Overview
International Accounting Standard 1 (IAS 1), also known as "Presentation of Financial Statements," is a fundamental accounting standard issued by the International Accounting Standards Board (IASB). It provides guidance on the presentation of financial statements to ensure consistency and comparability across different entities and jurisdictions. IAS 1 sets out the principles and requirements for the presentation of financial statements, ensuring that they are prepared consistently and transparently to facilitate meaningful analysis and decision-making by users. Compliance with IAS 1 enhances the credibility and usefulness of financial reporting, thereby promoting investor confidence and financial stability.
Objective of IAS 1
IAS 1, titled "Presentation of Financial Statements," indeed serves as a foundational guideline for how financial information should be presented in general-purpose financial statements. Let's break down the key points:
1. **Comparability with Previous Periods**: One of the primary objectives of IAS 1 is to ensure that financial statements can be compared with those of previous periods of the same entity. This means that users of financial statements can track the entity's financial performance and position over time, facilitating analysis and decision-making.
2. **Comparability with Other Entities**: Additionally, IAS 1 aims to ensure comparability between the financial statements of different entities. Establishing common standards for presentation, allows users to assess and compare the financial performance and position of different companies operating in similar industries or markets.
3. **Overall Requirements for Presentation**: IAS 1 lays down overarching principles and requirements for how financial statements should be presented. This includes aspects such as the order in which items should be listed, the use of headings and subtotals, and the inclusion of necessary disclosures to provide context and clarity.
4. **Guidelines for Structure**: The standard provides guidance on the structure of financial statements, outlining how they should be organized and presented to convey relevant information effectively. This ensures consistency in the presentation across different entities and facilitates user understanding.
5. **Minimum Content Requirements**: IAS 1 specifies the minimum information that must be included in financial statements to meet the needs of users. This includes key components such as balance sheets, income statements, cash flow statements, and statements of changes in equity, along with accompanying notes that provide additional detail and explanation.
Overall, by establishing clear guidelines for presentation, structure, and content, IAS 1 aims to enhance the usefulness and reliability of financial reporting, thereby promoting transparency, comparability, and informed decision-making by users of financial statements.
Scope:
IAS 1 applies to all general-purpose financial statements that are prepared and presented in accordance with International Financial Reporting Standards (IFRSs).
General-purpose financial statements are those intended to serve users who are not in a position to require financial reports tailored to their particular information needs.
Materiality:
Information is material if omitting, misstating, or obscuring it could
reasonably be expected to influence decisions that the primary users of
general-purpose financial statements make based on those financial
statements, which provide financial information about a specific reporting
entity.
Materiality depends on the nature or magnitude of information or both. An
entity assesses whether information, either individually or in combination
with other information, is material in the context of its financial statements
taken as a whole.
Objective of general purpose financial statement:
The objective of general-purpose financial statements, as outlined in IAS 1, is multifaceted and revolves around providing relevant, reliable, and understandable information to a broad spectrum of users. Here's an elaboration on how financial statements achieve this objective:
1. **Information about Financial Position**: Financial statements present a snapshot of an entity's financial position at a specific point in time. This includes details about its assets, liabilities, and equity. Assets represent what the entity owns, liabilities depict what it owes to others, and equity reflects the residual interest of the entity's owners.
2. **Information about Financial Performance**: Financial statements also reveal how well the entity has performed over a given period. This entails reporting on its income and expenses, which encompass revenues, gains, costs, and losses incurred during operations. By analyzing financial performance, users can assess the entity's profitability, efficiency, and overall success in achieving its objectives.
3. **Information about Cash Flows**: Another critical aspect of financial statements is the depiction of an entity's cash flows. This involves detailing the cash inflows and outflows resulting from operating activities, investing activities, and financing activities. Understanding the entity's cash flows is crucial for evaluating its liquidity, solvency, and ability to generate future cash inflows to meet its obligations.
4. **Contributions and Distributions to Owners**: Financial statements provide insights into the contributions made by owners (e.g., shareholders) to the entity, such as investments or capital injections. Additionally, they disclose distributions made to owners, including dividends or other returns on their investments. These details help users understand the relationship between the entity and its owners and the impact of such transactions on its financial position and performance.
5. **Prediction of Future Cash Flows**: By presenting comprehensive information about an entity's financial position, performance, and cash flows, financial statements aid users in predicting its future cash flows. Users can assess the entity's ability to generate cash inflows, the timing and certainty of those inflows, and the potential risks and uncertainties that may affect its financial health in the future.
In summary, the objective of general-purpose financial statements, as per IAS 1, is to furnish users with a holistic view of an entity's financial affairs, enabling them to make informed economic decisions. By providing transparent and insightful information about assets, liabilities, equity, income, expenses, contributions, distributions, and cash flows, financial statements facilitate user understanding and prediction of an entity's financial performance and prospects.
Components of Financial Statement:
Indeed, a comprehensive set of financial statements, as per IAS 1.10, includes:
1. **Statement of Financial Position (Balance Sheet)**: This provides a snapshot of the entity's financial position at the end of the reporting period, detailing its assets, liabilities, and equity.
2. **Statement of Profit or Loss and Other Comprehensive Income**: This statement showcases the entity's financial performance over the reporting period, presenting both the profit or loss section and other comprehensive income.
3. **Statement of Changes in Equity**: This statement illustrates the changes in the equity of the entity during the reporting period, including contributions by and distributions to owners and any other changes.
4. **Statement of Cash Flows**: This statement outlines the cash inflows and outflows from operating, investing, and financing activities, providing insights into the entity's cash position and liquidity.
5. **Notes to the Financial Statements**: These notes offer additional information, including significant accounting policies, explanations, and disclosures that provide context and clarity to the financial statements.
Additionally, when an entity applies accounting policies retrospectively, makes retrospective restatements, or reclassifies items, it must present a balance sheet as at the beginning of the earliest comparative period.
It's worth noting that while financial reviews by management, environmental reports, and value-added statements are important, they fall outside the scope of IFRSs and are typically presented separately from the financial statements.
Fair Presentation & Compliance with IFRS's:
IAS 1 emphasizes the importance of presenting financial statements that "fairly present" the financial position, financial performance, and cash flows of an entity. This fair presentation entails faithfully representing the effects of transactions, events, and conditions by the definitions and recognition criteria outlined in the Framework.
Compliance with IFRSs is presumed to result in financial statements that achieve fair presentation, with additional disclosures made when necessary. Entities are required to explicitly and unreservedly state their compliance with IFRSs in the notes to the financial statements. However, financial statements cannot be deemed to comply with IFRSs unless they adhere to all the requirements of IFRSs, including International Financial Reporting Standards, International Accounting Standards, IFRIC Interpretations, and SIC Interpretations.
Moreover, suppose an entity identifies that compliance with an IFRS requirement would be so misleading that it conflicts with the objective of financial statements as outlined in the Framework. In that case, it may depart from the requirement. In such rare circumstances, detailed disclosure of the nature, reasons, and impact of the departure is mandatory.
Inappropriate accounting policies cannot be rectified solely through disclosure of the policies used or by including notes or explanatory material. Compliance with the overarching objective of providing relevant and reliable financial information is paramount, even if it necessitates departing from a specific IFRS requirement in rare cases.
Going Concern:
The Conceptual Framework establishes the presumption that financial statements are prepared under the assumption that the entity will continue to operate as a going concern for the foreseeable future. This assumption is crucial for providing relevant and reliable financial information to users.
However, IAS 1 mandates that management must assess the entity's ability to continue as a going concern. If significant doubts exist regarding the entity's ability to continue as a going concern, these uncertainties must be disclosed in the financial statements. Such disclosures are essential for users to understand the potential risks and uncertainties surrounding the entity's future operations.
In cases where management concludes that the entity is not a going concern, the financial statements should not be prepared on a going concern basis. Instead, IAS 1 requires a series of disclosures to be made regarding the basis of preparation, the reasons for not adopting the going concern assumption, and the implications for the financial statements.
These requirements ensure that users are provided with transparent and relevant information about an entity's financial position and prospects, enabling them to make informed decisions.
Accrual Basis of Accounting:
When preparing financial statements, except for cash flow information, entities are required to utilize the accrual basis of accounting. Under the accrual basis, transactions and events are recognized when they occur (not necessarily when cash is received or paid) and are recorded in the financial statements in the period to which they relate, regardless of when cash is exchanged.
According to this principle:
1. **Recognition of Elements**: An entity recognizes items as assets, liabilities, equity, income, and expenses (the elements of financial statements) when they meet the definitions and recognition criteria outlined in the Conceptual Framework.
2. **Timing of Recognition**: Recognition occurs when the underlying economic substance of the transaction or event satisfies the criteria for recognition, regardless of when the related cash flows occur.
This accrual basis of accounting provides a more accurate representation of an entity's financial position and performance by matching revenues with expenses incurred to generate those revenues, providing users with more relevant information for decision-making.
Consistency of Presentation:
This means that unless there's a valid reason, the way items are presented and classified in a company's financial statements should remain consistent from one period to the next. These presentations and classifications are crucial for investors, analysts, and other stakeholders to understand the financial health and performance of the company over time.
However, there are two situations where changes may be justified:
1. **Change in circumstances**: If there's a significant change in the company's operations, financial structure, or regulatory environment, it may necessitate a change in how certain items are presented or classified in the financial statements. For example, if a company adopts a new business model, merges with another company, or undergoes a significant reorganization, the old classifications and presentations may no longer accurately represent the company's financial position.
2. **Requirement of a new IFRS**: If a new International Financial Reporting Standard (IFRS) is introduced by the International Accounting Standards Board (IASB), and it requires changes to the presentation or classification of items in the financial statements, then the company must comply with these new requirements. This ensures consistency and comparability across companies following the same set of accounting standards.
In both cases, the changes should be justified, transparent, and explained in the financial statements or accompanying notes. This helps stakeholders understand why the changes were made and how they affect the interpretation of the financial information. Consistency in presentation and classification is generally preferred to facilitate meaningful analysis and comparison of financial performance over time.
Materiality & Aggregation:
Let's know about materiality & aggregation in detail & easy way-
1. **Presentation of Similar and Dissimilar Items**: The entity should present each material class of similar items separately in the financial statements. Conversely, items of dissimilar nature or function should be presented separately unless they are immaterial. This ensures that users of the financial statements can easily identify and analyze different types of transactions or events.
2. **Aggregation and Classification**: Financial statements are the result of aggregating and classifying numerous transactions or events into classes based on their nature or function. The final presentation involves condensing and classifying this data into line items in the financial statements. If an individual line item is not material, it can be aggregated with other items in either the statements or the notes. However, if an item is not material enough for a separate presentation in the statements, it may still warrant a separate presentation in the notes.
3. **Consideration of Materiality**: When applying IFRSs, entities must consider all relevant facts and circumstances to decide how to aggregate information in the financial statements and notes. They should not obscure material information with immaterial information or aggregate material items that have different natures or functions. This ensures that the financial statements remain understandable and relevant to users.
4. **Disclosure Requirements**: Some IFRSs specify information that must be included in the financial statements and notes. However, entities are not required to provide specific disclosures if the resulting information is not material, even if the IFRS contains a list of requirements or describes them as minimum requirements. Additionally, entities should consider providing additional disclosures when compliance with specific requirements is insufficient to enable users to understand the impact of particular transactions, events, or conditions on the entity's financial position and performance.
In summary, these principles emphasize the importance of presenting financial information clearly, ensuring material items are appropriately highlighted, and providing necessary disclosures to enable users to make informed decisions.
Offsetting:
IAS 1 (International Accounting Standard 1) outlines guidelines regarding the presentation of financial information, particularly concerning the offsetting of assets and liabilities, as well as income and expenses in financial statements. Let's break the key points:
1. **General Principle on Offsetting**: The general principle states that an entity should not offset assets and liabilities, or income and expenses, in its financial statements unless it's required or permitted by an IFRS (International Financial Reporting Standard). This means that unless there's a specific requirement or allowance within the accounting standards, offsetting should not be done.
2. **Reasons for Avoiding Offsetting**: Offsetting in the statement of profit or loss and other comprehensive income or financial position can hinder users' understanding of transactions, events, and conditions that have occurred. It can also make it difficult for users to assess the entity's future cash flows. Therefore, offsetting should only be done when it truly reflects the substance of the transaction or event.
3. **Exceptions to Offsetting**: While generally discouraging offsetting, the standard provides some exceptions where offsetting is appropriate. For example:
- Offsetting is allowed when measuring assets net of valuation allowances, such as obsolescence allowances on inventories and doubtful debts allowances on receivables.
- IFRS 15 Revenue from Contracts with Customers requires the recognition of revenue at the amount of consideration expected to be received in exchange for promised goods or services. This may involve adjusting revenue for trade discounts and volume rebates.
- Results of certain transactions, which are incidental to the main revenue-generating activities, can be presented on a net basis if it reflects the substance of the transaction. For instance, gains and losses on the disposal of non-current assets can be presented net of related selling expenses.
4. **Presentation of Similar Transactions**: Gains and losses arising from a group of similar transactions, such as foreign exchange gains and losses or gains and losses on financial instruments held for trading, can be presented on a net basis. However, they should be presented separately if they are material.
In summary, IAS 1 emphasizes the importance of transparency and clarity in financial reporting by discouraging offsetting unless it accurately reflects the substance of transactions and events. It also provides specific instances where offsetting is allowed or required under certain circumstances.
Comparative Information:
IAS 1 specifies requirements and recommendations regarding comparative information in financial statements. Let's break down the key points:
1. **Minimum Comparative Information**: Generally, entities are required to present comparative information for the preceding period alongside the current period's financial statements. This includes all amounts reported in the current period's financial statements. Additionally, narrative and descriptive information relevant to understanding the current period's financial statements should also be provided with comparative information when applicable.
2. **Minimum Comparative Statements**: As a minimum requirement, entities should present two sets of comparative financial statements, including:
- Two statements of financial position (commonly known as balance sheets),
- Two statements of profit or loss and other comprehensive income,
- Two separate statements of profit or loss (if presented),
- Two statements of cash flows,
- Two statements of changes in equity, along with related notes.
3. **Relevance of Narrative Information**: In certain cases, narrative information from preceding periods may continue to be relevant in the current period. For instance, details of a legal dispute with an uncertain outcome at the end of the preceding period may still be pertinent in the current period. In such cases, disclosing the uncertainty that existed in the preceding period and steps taken to resolve it during the current period can provide users with valuable context.
4. **Additional Comparative Information**: Entities have the option to present additional comparative information beyond the minimum required by IFRSs, as long as it's prepared in accordance with those standards. This additional comparative information may include one or more statements, such as a third statement of profit or loss and other comprehensive income. However, it's not necessary to provide a complete set of financial statements for the additional comparative period. Instead, the entity should present related note information for those additional statements to ensure clarity and transparency.
In summary, IAS 1 emphasizes the importance of providing comparative information to aid users' understanding of the current period's financial statements. It outlines both the minimum requirements and the flexibility for entities to include additional comparative information, ensuring that users have access to relevant and comprehensive financial information for decision-making purposes.
Structure & Content of financial statements in general:
IAS 1 emphasizes the importance of clearly identifying financial statements and distinguishing them from other information presented in the same document. Let's break down the key points:
1. **Clarity and Distinction**: It's crucial for users to differentiate between financial statements prepared in accordance with IFRSs and other information included in documents like annual reports or regulatory filings. While IFRSs apply specifically to financial statements, other information provided may also be relevant to users but might not be subject to the same accounting standards.
2. **Identification of Financial Statements**: The entity must clearly identify each financial statement and accompanying notes. This includes prominently displaying the following information:
- The name of the reporting entity or other means of identification, along with any changes from the end of the preceding reporting period.
- Whether the financial statements pertain to an individual entity or a group of entities.
- The date of the end of the reporting period or the period covered by the financial statements or notes.
- The presentation currency used, as defined in IAS 21 (International Accounting Standard 21).
- The level of rounding used in presenting amounts in the financial statements.
3. **Repetition for Clarity**: This information should be prominently displayed and repeated when necessary to ensure that users can easily understand the financial statements and associated information. Clear identification helps users navigate the document and understand the context and relevance of the financial information provided.
In summary, IAS 1 underscores the need for clear identification and distinction of financial statements within a document, ensuring users can easily distinguish them from other information and understand key details such as the reporting entity, reporting period, currency, and level of rounding used. This clarity enhances transparency and facilitates users' understanding and interpretation of the financial information presented.
Reporting Period:
IAS 1 outlines the requirement for entities to present a complete set of financial statements, including comparative information, at least annually. However, it acknowledges that there may be circumstances where an entity changes the end of its reporting period, resulting in financial statements covering a period longer or shorter than one year. Let's delve into the explanation:
1. **Requirement for Annual Financial Statements**: The standard mandates that entities must prepare and present a complete set of financial statements annually. This ensures that stakeholders have access to up-to-date financial information about the entity's performance, financial position, and cash flows.
2. **Disclosure for Changes in Reporting Period**: If an entity changes the end of its reporting period, leading to financial statements covering a period longer or shorter than one year, the entity must provide additional disclosures:
- Reason for the change: The entity should explain the rationale behind the decision to use a longer or shorter reporting period. This disclosure helps stakeholders understand the circumstances driving the change.
- Lack of comparability: The entity must also disclose that the amounts presented in the financial statements are not entirely comparable due to the change in reporting period. This notification alerts users to the potential limitations in comparing financial information across periods.
3. **Flexibility in Reporting Period**: While the standard typically expects entities to prepare financial statements for a one-year period, it acknowledges that some entities may have practical reasons for adopting alternative reporting periods, such as a 52-week period. The standard does not prohibit this practice, provided that the entity provides the necessary disclosures regarding the change and its implications for comparability.
In summary, while the standard requires entities to present annual financial statements, it acknowledges that changes in reporting periods may occur. Entities must disclose the reasons for such changes and the impact on comparability to ensure stakeholders can interpret the financial information accurately. Additionally, the standard allows for flexibility in reporting periods to accommodate practical considerations.
Statement of Financial Position:
Current & Non-Current Distinction-
IAS 1 outlines guidelines for presenting current and non-current assets, as well as current and non-current liabilities in the statement of financial position. Let's break down the key points:
1. **Separate Classification of Assets and Liabilities**: By default, entities are required to present current and non-current assets, and current and non-current liabilities, as separate classifications in their statement of financial position. This classification helps users understand the liquidity and solvency of the entity by distinguishing between short-term and long-term assets and liabilities.
2. **Exception for Liquidity-Based Presentation**: However, if presenting assets and liabilities based on liquidity provides information that is more reliable and relevant, the entity can opt for this method instead. In such cases, all assets and liabilities should be presented in order of liquidity. This approach may be particularly suitable for entities, such as financial institutions, that don't operate within a clearly identifiable operating cycle.
3. **Disclosure of Expected Recovery/Settlement Dates**: Regardless of the chosen presentation method, the entity must disclose the amount expected to be recovered or settled after more than twelve months for each asset and liability line item. This disclosure helps users understand the timing of cash flows related to these assets and liabilities, enhancing their assessment of liquidity and solvency.
4. **Importance of Operating Cycle for Some Entities**: For entities with clearly identifiable operating cycles, separate classification of current and non-current assets and liabilities provides useful information by distinguishing between assets and liabilities expected to be realized or settled within the current operating cycle and those used in long-term operations.
5. **Mixed Basis of Presentation**: In certain cases, entities may adopt a mixed basis of presentation, classifying some assets and liabilities using a current/non-current classification and others based on liquidity. This flexibility is permitted when it provides reliable and relevant information, especially for entities with diverse operations.
6. **Disclosure of Maturity Dates**: Additionally, IFRS 7 requires disclosure of the maturity dates of financial assets and financial liabilities, including trade receivables and payables. This information helps users understand the timing of cash flows related to these financial instruments.
In summary, IAS 1 emphasizes the importance of presenting assets and liabilities in a manner that provides reliable and relevant information for users to assess an entity's liquidity and solvency. It highlights the flexibility allowed in presentation methods and underscores the significance of disclosing expected recovery/settlement dates for assets and liabilities.
Current Asset:
IAS 1 outlines the criteria for classifying assets as current or non-current in the statement of financial position. Let's break down the key points:
1. **Criteria for Classifying Assets as Current**: An asset is classified as current when:
a. It's expected to be realized, sold, or consumed within the entity's normal operating cycle.
b. It's held primarily for the purpose of trading.
c. It's expected to be realized within twelve months after the reporting period.
d. It's cash or a cash equivalent, unless it's restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.
2. **Classification of Other Assets**: All assets not meeting the above criteria are classified as non-current.
3. **Definition of Non-Current Assets**: The term "non-current" encompasses tangible, intangible, and financial assets of a long-term nature. However, alternative descriptions can be used as long as the meaning is clear.
4. **Operating Cycle**: The operating cycle of an entity is the time between the acquisition of assets for processing and their realization in cash or cash equivalents. If the normal operating cycle is not clearly identifiable, it's assumed to be twelve months.
5. **Inclusion of Certain Assets as Current**: Current assets include not only assets expected to be realized within twelve months but also assets sold, consumed, or realized as part of the normal operating cycle, even if they're not expected to be realized within twelve months after the reporting period. Additionally, assets held primarily for trading purposes and the current portion of non-current financial assets are classified as current assets.
In summary, IAS 1 clarifies the criteria for classifying assets as current or non-current in the statement of financial position. It highlights the importance of considering an asset's expected realization timeframe, its purpose, and any restrictions on its use when determining its classification.
Current Liabilities:
IAS 1 outlines the criteria for classifying liabilities as current or non-current in the statement of financial position. Let's break down the key points:
1. **Criteria for Classifying Liabilities as Current**: A liability is classified as current when:
a. It's expected to be settled in the entity's normal operating cycle.
b. It's held primarily for trading purposes.
c. It's due to be settled within twelve months after the reporting period.
d. The entity does not have the right to defer settlement for at least twelve months after the reporting period.
2. **Classification of Other Liabilities**: All other liabilities not meeting the above criteria are classified as non-current.
3. **Normal Operating Cycle**: Some current liabilities, such as trade payables and accruals for operating costs, are considered part of the entity's working capital and are classified as current liabilities, even if they're due to be settled more than twelve months after the reporting period. The normal operating cycle is assumed to be twelve months if not clearly identifiable.
4. **Financial Liabilities**: Other current liabilities include those due for settlement within twelve months after the reporting period, such as bank overdrafts and dividends payable. Financial liabilities providing financing on a long-term basis are classified as non-current liabilities unless due for settlement within twelve months.
5. **Right to Defer Settlement**: An entity's right to defer settlement of liability for at least twelve months after the reporting period must exist at the end of the reporting period. If the entity breaches a long-term loan arrangement resulting in the liability becoming payable on demand, it's classified as current unless the lender agrees to provide a grace period of at least twelve months for rectification.
6. **Settlement of Liabilities**: Settlement refers to the transfer of economic resources or the entity's own equity instruments that result in the extinguishment of the liability. The terms of a liability allowing settlement by the transfer of the entity's own equity instruments do not affect its classification if the entity classifies the option as an equity instrument according to IAS 32.
In summary, it clarifies the criteria for classifying liabilities as current or non-current in the statement of financial position. It emphasizes the importance of considering the expected settlement timeframe and the entity's rights and obligations regarding deferment when determining the classification of liabilities.
Line Item:
The line items to be included on the face of the statement of financial position are: [IAS 1.54]
(a) property, plant, and equipment
(b) investment property
(c) intangible assets
(d) financial assets (excluding amounts shown under (e), (h), and (i))
(e) investments accounted for using the equity method
(f) biological assets
(g) inventories
(h) trade and other receivables
(i) cash and cash equivalents
(j) assets held for sale
(k) trade and other payables
(l) provisions
(m) financial liabilities (excluding amounts shown under (k) and (l))
(n) current tax liabilities and current tax assets, as defined in IAS 12
(o) deferred tax liabilities and deferred tax assets, as defined in IAS 12
(p) liabilities included in disposal groups
(q) non-controlling interests, presented within equity
(r) issued capital and reserves attributable to owners of the parent.
Additional line items, headings, and subtotals may be needed to fairly present the entity's financial position.
When an entity presents subtotals, those subtotals shall be comprised of line items made up of amounts recognized and measured in accordance with IFRS; be presented and labeled in a clear and understandable manner; be consistent from period to period; and not be displayed with more prominence than the required subtotals and totals.
* Added by Disclosure Initiative (Amendments to IAS 1), effective 1 January 2016.
Further sub-classifications of line items presented are made in the statement or in the notes, for example:
classes of property, plant, and equipment disaggregation of receivables disaggregation of inventories in accordance with IAS 2 Inventories disaggregation of provisions into employee benefits and other items classes of equity and reserves.
Format of Statement:
IAS 1 does not prescribe the format of the statement of financial position. Assets can be presented as current then non-current, or vice versa, and liabilities and equity can be presented as 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 the UK and elsewhere – fixed assets + current assets - short-term payables = long-term debt plus equity – is also acceptable.
Share capital & reserve:
IAS 1 ensures transparency and provides stakeholders with essential information about an entity's share capital and reserves:
1. **Numbers of Shares Authorized, Issued, and Fully Paid**: The entity must disclose the total number of shares authorized for issuance, the number of shares actually issued, and the number of shares that have been fully paid for. This information helps stakeholders understand the capital structure of the entity.
2. **Issued but Not Fully Paid and Par Value**: If there are shares that have been issued but not fully paid for, the entity must disclose this, along with the par value of the shares if applicable. In cases where shares do not have a par value, this fact should also be disclosed.
3. **Reconciliation of Shares Outstanding**: The entity must provide a reconciliation of the number of shares outstanding at the beginning and the end of the reporting period. This helps stakeholders understand any changes in the share capital structure over the reporting period.
4. **Rights, Preferences, and Restrictions**: A description of the rights, preferences, and restrictions associated with different classes of shares must be provided. This includes details such as voting rights, dividend preferences, and any restrictions on share transfers.
5. **Treasury Shares**: Disclosure of treasury shares, which are shares of the entity's own stock that it has repurchased, including any shares held by subsidiaries and associates. This helps stakeholders understand the entity's ownership of its own shares.
6. **Shares Reserved for Issuance**: Information about shares reserved for issuance under options and contracts, such as employee stock option plans or convertible bonds, must be disclosed.
7. **Description of Nature and Purpose of Each Reserve**: The entity must provide a description of the nature and purpose of each reserve within equity. Reserves can include items such as retained earnings, share premiums, and revaluation reserves. This disclosure helps stakeholders understand the composition of equity and the reasons for changes in equity balances.
Additional disclosures may be required for entities without share capital and when an entity has reclassified puttable financial instruments. These requirements ensure that stakeholders have comprehensive information about the entity's equity structure and any changes that may impact its financial position and performance.
Statement of Profit or Loss & other comprehensive income:
Concepts of profit or loss and comprehensive income
Profit or loss is defined as "the total of income less expenses, excluding the components of other comprehensive income". Other comprehensive income is defined as comprising "items of income and expense (including reclassification adjustments) that are not recognized in profit or loss as required or permitted by other IFRSs". Total comprehensive income is defined as "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". [IAS 1.7]
All items of income and expense recognized in a period must be included in profit or loss unless a Standard or an Interpretation requires otherwise. [IAS 1.88] Some IFRSs require or permit that some components to be excluded from profit or loss and instead to be included in other comprehensive income.
In addition, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires the correction of errors and the effect of changes in accounting policies to be recognized outside profit or loss for the current period. [IAS 1.89]
Information to be presented in the other comprehensive income
section
International Accounting Standard (IAS) 1, provides guidelines on the presentation of financial statements, specifically focusing on the statement of profit or loss and other comprehensive income. Let's break down the key points:
1. **Presentation of Other Comprehensive Income (OCI)**:
- The OCI section of the statement should include:
- Items of other comprehensive income classified by nature.
- The share of OCI of associates and joint ventures accounted for using the equity method.
- These should be grouped into those that will not be reclassified subsequently to profit or loss and those that will be reclassified subsequently to profit or loss when specific conditions are met.
2. **Additional Line Items and Subtotals**:
- Entities should present additional line items, headings, and subtotals in the statement of profit or loss and other comprehensive income when such presentation is relevant for understanding the entity’s financial performance.
- Subtotals should be comprised of line items recognized and measured according to IFRS, presented clearly, consistently from period to period, and not given more prominence than required by IFRS.
3. **Reconciliation of Subtotals**:
- Line items should reconcile any subtotals presented in accordance with the guidelines mentioned earlier with the subtotals or totals required in IFRS for such statements.
4. **Disclosure of Financial Performance Components**:
- The standard emphasizes the importance of disclosing the components of financial performance to assist users in understanding achieved financial performance and making projections.
- Entities are encouraged to include additional line items, amend descriptions, and reorder items as necessary to explain financial performance, considering factors like materiality and the nature of income and expense items.
5. **Treatment of Extraordinary Items**:
- The standard prohibits presenting any items of income or expense as extraordinary items in the statement of profit or loss and other comprehensive income or in the notes.
Overall, these guidelines aim to enhance the transparency, relevance, and comparability of financial statements, ensuring that users can understand an entity's financial performance effectively.
Profit or Loss Section or Statement:
The following minimum line items must be presented in the profit or loss section (or a separate statement of profit or loss if presented): [IAS 1.82-82A]
-revenue
-gains and losses from the derecognition of financial assets measured at amortized cost
-finance costs
-share of the profit or loss of associates and joint ventures accounted for using the equity method
-certain gains or losses associated with the reclassification of financial assets
-tax expense
-a single amount for the total of discontinued items
Expenses recognized in profit or loss should be analyzed either by nature (raw materials, staffing costs, depreciation, etc.) or by function (cost of sales, selling, administrative, etc). [IAS 1.99] If an entity categorizes by function, then additional information on the nature of expenses – at a minimum depreciation, amortization, and employee benefits expense – must be disclosed. [IAS 1.104]
Other Requirement:
Additional line items may be needed to fairly present the entity's results of operations. [IAS 1.85]
Items cannot be presented as 'extraordinary items' in the financial statements or in the notes. [IAS 1.87]
Certain items must be disclosed separately either in the statement of comprehensive income or in the notes, if material, including: [IAS 1.98]
-write-downs of inventories to net realizable value or of property, plant, and equipment to recoverable amount, as well as reversals of such write-downs
-restructurings of the activities of an entity, and reversals of any provisions for the costs of restructuring
-disposals of items of property, plant and equipment
-disposals of investments
-discontinuing operations
-litigation settlements
-other reversals of provisions
Statement of Changes in Equity:
Information to be presented in the statement of changes in equity:
IAS 1 outlines the requirements for presenting a statement of changes in equity, which is a crucial component of financial reporting.. Let's break down the key points:
1. **Total Comprehensive Income**: The statement of changes in equity should include the total comprehensive income for the period, separately showing the amounts attributable to the owners of the parent and to non-controlling interests. This ensures transparency regarding the overall financial performance of the entity and how it affects both the controlling and non-controlling interests.
2. **Effects of Retrospective Application or Restatement**: For each component of equity, the effects of retrospective application or restatement recognized in accordance with IAS 8 should be disclosed. This involves revising previously reported financial statements to reflect new information, ensuring that the equity section accurately reflects the entity's financial position.
3. **Reconciliation of Changes in Equity**: The statement should provide a reconciliation for each component of equity between the carrying amount at the beginning and the end of the period. This reconciliation should separately disclose changes resulting from:
- Profit or loss: Reflects the impact of the entity's operational performance on equity.
- Other comprehensive income: Reflects items that are not included in profit or loss but still affect equity, such as gains or losses from revaluation of assets.
- Transactions with owners: Reflects contributions made by owners (such as share issuances) and distributions to owners (such as dividends), as well as changes in ownership interests in subsidiaries that do not result in a loss of control. This ensures transparency regarding the equity transactions and changes in ownership structure during the reporting period.
Overall, the statement of changes in equity provides valuable insights into how various factors, including operational performance, changes in accounting policies, and transactions with owners, impact the equity position of the entity. It helps stakeholders understand the dynamics of the entity's equity and its underlying drivers.
Information to be presented in the statement of changes in equity
or in the notes:
IAS 1 outlines the requirements for presenting changes in equity in financial statements, particularly focusing on the statement of changes in equity or the accompanying notes. Let's break down the key points:
1. **Analysis of Other Comprehensive Income**: For each component of equity, the entity should present an analysis of other comprehensive income by item. This analysis helps stakeholders understand the specific components contributing to changes in equity that arise from items not included in the profit or loss statement.
2. **Dividends Recognition**: The entity should disclose in either the statement of changes in equity or the notes the amount of dividends recognized as distributions to owners during the period, along with the related amount of dividends per share. This ensures transparency regarding the distribution of profits to shareholders.
3. **Components of Equity**: The components of equity include each class of contributed equity, the accumulated balance of each class of other comprehensive income, and retained earnings. These components provide a comprehensive view of the entity's equity structure.
4. **Changes in Equity Reflect Net Assets Changes**: Changes in an entity’s equity between the beginning and end of the reporting period reflect the increase or decrease in its net assets during that period. This excludes changes resulting from transactions with owners (e.g., equity contributions, dividends) and related transaction costs.
5. **Retrospective Adjustments and Restatements**: IAS 8 requires retrospective adjustments for changes in accounting policies and corrections of errors, to the extent practicable. These adjustments are not changes in equity but are adjustments to the opening balance of retained earnings, except when an IFRS requires retrospective adjustment of another component of equity.
6. **Disclosure of Adjustments**: The statement of changes in equity should disclose the total adjustment to each component of equity resulting from changes in accounting policies and corrections of errors, separately for each prior period and the beginning of the current period. This ensures transparency regarding the impact of accounting policy changes and corrections of errors on the entity's equity position.
Overall, these requirements aim to provide stakeholders with a clear understanding of the changes in an entity's equity position, including the impact of other comprehensive income, dividends, retrospective adjustments, and corrections of errors.
Statement of Cash Flows:
Cash flow information provides users of financial statements with a basis to
assess the ability of the entity to generate cash and cash equivalents and the
needs of the entity to utilize those cash flows. IAS 7 sets out requirements for
the presentation and disclosure of cash flow information.
Notes:
This excerpt from the International Accounting Standard (IAS) 1 outlines the requirements for presenting notes to the financial statements. Let's break down the key points:
1. **Basis of Preparation and Accounting Policies**:
- The notes should present information about the basis of preparation of the financial statements and the specific accounting policies used. This includes details on how the financial statements were prepared and the accounting principles applied in accordance with relevant IFRS standards.
2. **Disclosure of Additional Information**:
- The notes should disclose any information required by IFRSs that is not presented elsewhere in the financial statements. This ensures that all necessary disclosures are made to provide a comprehensive understanding of the entity's financial position and performance.
3. **Relevance and Systematic Presentation**:
- Notes should be presented in a systematic manner, considering the effect on the understandability and comparability of the financial statements. This systematic presentation ensures that users can easily locate and comprehend the information they need.
- Examples of systematic ordering or grouping of the notes include giving prominence to relevant areas of the entity's activities, grouping similar items together, or following the order of line items in the primary financial statements.
4. **Cross-Referencing**:
- Each item in the financial statements should be cross-referenced to any related information in the notes. This helps users navigate the financial statements and understand the context and details behind the reported numbers.
5. **Separate Presentation of Basis of Preparation and Accounting Policies**:
- An entity may present notes providing information about the basis of preparation of the financial statements and specific accounting policies as a separate section of the financial statements. This allows for clear and focused disclosure of fundamental information regarding the preparation and accounting treatment applied in the financial statements.
Overall, the requirements for presenting notes aim to enhance transparency, comparability, and understandability of the financial statements, ensuring that users have access to relevant information to make informed decisions.
Other Disclosure:
Judgements & Key Assumption:
IAS 1 highlight the requirements for disclosing significant judgments and key sources of estimation uncertainty in financial statements:
1. **Disclosure of Significant Judgements**:
- Management's judgments play a crucial role in applying an entity's accounting policies. Apart from estimations, significant judgments made by management should be disclosed in the summary of significant accounting policies or other notes.
- These judgments are the ones that have the most significant effect on the amounts recognized in the financial statements. Examples provided include judgments related to determining when significant risks and rewards of ownership are transferred and whether certain sales of goods are considered financing arrangements rather than revenue recognition events.
2. **Disclosure of Key Sources of Estimation Uncertainty**:
- In addition to judgments, the entity must disclose information about key assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period.
- These disclosures focus on factors that have a significant risk of causing material adjustments to the carrying amounts of assets and liabilities within the next financial year.
- Notably, these disclosures do not involve disclosing budgets or forecasts but rather focus on key assumptions and uncertainties that could impact the financial statements.
Overall, these disclosure requirements aim to provide users of financial statements with insights into the significant judgments made by management and the key sources of uncertainty underlying the reported amounts. This transparency helps users assess the reliability and potential risks associated with the financial information presented.
Dividends:
IAS 1 specifies additional disclosure requirements regarding dividends in the notes to the financial statements:
1. **Dividends Proposed or Declared Before Authorization for Issue**:
- The notes must disclose the amount 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.
- These are dividends that have been formally proposed or declared by the entity's management or board of directors but have not yet been paid or otherwise distributed to shareholders.
- By disclosing this information, users of the financial statements can understand the total amount of dividends that have been proposed or declared by the entity, providing insights into the entity's dividend policy and its impact on shareholders' equity.
2. **Cumulative Preference Dividends Not Recognized**:
- Additionally, the notes must disclose the amount of any cumulative preference dividends that have not been recognized.
- Cumulative preference dividends are dividends owed to preferred shareholders that have not been paid in previous periods. These dividends accumulate if they are not paid when due.
- By disclosing the amount of cumulative preference dividends not recognized, the entity informs users about the outstanding obligations to preferred shareholders and any potential impact on the entity's financial position and performance.
Overall, these disclosure requirements ensure transparency regarding dividends, both proposed or declared but not yet recognized as distributions to owners, and any outstanding cumulative preference dividends. This information assists users in assessing the entity's financial position, dividend policy, and obligations to shareholders.
Capital Disclosures:
An entity discloses information about its objectives, policies, and processes for managing capital. [IAS 1.134] To comply with this, the disclosures include: [IAS 1.135]
-qualitative information about the entity's objectives, policies, and processes for managing capital, including>
-description of capital it manages
-nature of external capital requirements, if any
-how it is meeting its objectives
-quantitative data about what the entity regards as capital
-changes from one period to another
-whether the entity has complied with any external capital requirements
-and if it has not complied, the consequences of such non-compliance.
Other Information:
The following other note disclosures are required by IAS 1 if not disclosed elsewhere in information published with the financial statements: [IAS 1.138]
-domicile and legal form of the entity
-country of incorporation
-address of the registered office or principal place of business
-description of the entity's operations and principal activities
-if it is part of a group, the name of its parent and the ultimate parent of the group
-if it is a limited life entity, information regarding the length of the life
Puttable Financial Instrument:
IAS 1.136A introduces additional disclosure requirements specifically aimed at entities that have puttable instruments classified as equity instruments. Puttable instruments are financial instruments that give the holder the right to require the issuer to repurchase or redeem the instruments under certain conditions. Here's an explanation of each requirement:
1. **Summary Quantitative Data about Amount Classified as Equity**:
- The entity must provide summary quantitative data about the amount classified as equity for the puttable instruments. This disclosure ensures transparency regarding the portion of the entity's equity that is attributable to these instruments.
2. **Objectives, Policies, and Processes for Managing Obligation to Repurchase or Redeem Instruments**:
- The entity is required to disclose its objectives, policies, and processes for managing its obligation to repurchase or redeem the instruments when required by the holders.
- This disclosure provides insight into how the entity intends to meet its obligations to repurchase or redeem the instruments, including any changes from the previous period. It helps stakeholders understand the entity's approach to managing its puttable instruments and associated risks.
3. **Expected Cash Outflow on Redemption or Repurchase**:
- The entity must disclose the expected cash outflow on redemption or repurchase of that class of financial instruments.
- This disclosure quantifies the financial impact of potential redemptions or repurchases, providing stakeholders with an understanding of the potential cash obligations associated with the puttable instruments.
4. **Information about Determination of Expected Cash Outflow**:
- Additionally, the entity should provide information about how the expected cash outflow on redemption or repurchase was determined.
- This disclosure explains the methodology or assumptions used in estimating the expected cash outflow, ensuring transparency regarding the basis for the disclosed amount.
Overall, these additional disclosures aim to provide stakeholders with comprehensive information about the entity's puttable instruments, including their classification, management, potential cash outflows, and the methodology behind the determination of expected cash outflows. This helps stakeholders assess the potential impact of puttable instruments on the entity's financial position and performance.
The following other note disclosures are required by IAS 1 if not disclosed elsewhere in information published with the financial statements: [IAS 1.138]
- domicile and legal form of the entity
- country of incorporation
- address of registered office or principal place of business
- description of the entity's operations and principal activities
- if it is part of a group, the name of its parent and the ultimate parent of the group
- if it is a limited life entity, information regarding the length of the life
IAS 1 applies to all general purpose financial statements that are prepared and presented in accordance with International Financial Reporting Standards (IFRSs). [IAS 1.2]
General purpose financial statements are those intended to serve users who are not in a position to require financial reports tailored to their particular information needs. [IAS 1.7]
IAS 1 applies to all general purpose financial statements that are prepared and presented in accordance with International Financial Reporting Standards (IFRSs). [IAS 1.2]
General purpose financial statements are those intended to serve users who are not in a position to require financial reports tailored to their particular information needs. [IAS 1.7]
