for Accounting Professionals
IAS 1Presentation of financial statements
2011
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IAS 1Presentation of financial statements
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Robin Joyce
Professor of the Chair of
International Banking and Finance
Financial University
under the Government of the Russian Federation
Visiting Professor of the Siberian Academy of Finance and Banking Moscow, Russia 2011 Updated
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Presentation of Financial Statements
CONTENTS
1.Presentation of Financial Statements – Introduction 4
2. Definitions 6
3.Fair Presentation and Compliance with IFRSs 7
4. Going Concern 9
5. Accrual Basis of Accounting 11
6. Consistency of Presentation 11
7. Materiality and Aggregation 12
8. Offsetting 14
9. Comparative Information 16
10. General Review 18
11. Identification of the Financial Statements 19
12. Frequency of Reporting 20
13. Statement of financial position 21
14. Information to be Presented on the Face of the Statement of financial position (balance sheet) 29
15. Information to be Presented either on the Face of the Statement of Financial Position, or in the Notes 31
16. Statement of comprehensive income 32
17. Information to be Presented either on the Face of the Income Statement, or in the Notes 37
18. Statement of Changes in Equity 42
19. Statement of Cash Flows 45
20. Notes 45
22. Capital 50
23. Other Disclosures 50
24. Annex- Amendments to IAS 1 - IFRS News November 2007 51
25. Multiple choice questions 53
26. Answers to multiple choice questions 59
Note: Material from the following PricewaterhouseCoopers publications has been used in this workbook:
-Applying IFRS
-IFRS News
-Accounting Solutions
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.
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.
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).
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.
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 flows 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 is regarded as an important user group.
Reports and statements presented outside financial statements are outside the scope of IFRSs.
2. 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 – these will disappear in IFRS 9);
(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. 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: