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International Accounting International Accounting StandardsStandards

IAS 1 Presentation of Financial Statements

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Objective

To explain the bases for the presentation of general purpose financial statements

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ScopeIAS 1 sets out the overall considerations for the presentation of financial statements, guidelines for their structure, and the minimum content requirements

It also requires financial statements to: present fairly the financial position, performance and cash flow and to be prepared on an accrual and going concern basis

It must be applied for all financial statements prepared in accordance with IAS.

It is applicable for all types of enterprises, including bank and insurance companies.

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Components and Structure of Financial Statements

A complete set of financial statements must include the following components:

a balance sheet;an income statement;a statement of changes in equity;a cash flow statement; andaccounting policies and explanatory notes.

The entity’s management/directors is responsible for preparing and presenting the financial statements.

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Continued-Components…IAS 1 encourages entities to present a financial review or comment on their financial

performance, financial position and the uncertainties faced.

additional statements such as environmental reports.

Financial statements and each component of the financial statements must be clearly identified and distinguished from other information in the annual report.

IASs apply only to the financial statements and not to other information presented in the annual report.

Financial statements must be presented at least annually.

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Continued-Components…

IAS 1 states that an entity should be in a position to issue financial statements within 6 months from the balance sheet date.

The following information must also be clear: the name of the reporting entity whether the financial statements cover individual financial

statements or consolidated financial statements, the balance sheet date, or period of reporting, reporting currency, and level of precision of financial statement figures (e.g., millions).

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Overall Considerations

The overall factors included in IAS 1 are: Going concern Accrual basis of accounting Materiality and aggregation Offsetting Accounting policies Consistency of presentation Comparative information Compliance with IASs Fair presentation and compliance with International

Accounting Standards

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Going Concern

Going Concern – an assessment of the enterprise’s ability to continue as a going concern must be made at each reporting date.

FS should be prepared on a going concern basis – unless the business will cease or there is no realistic alternative but to liquidate.

Disclosure requirements if: there are uncertainties regarding the ability to continue as

a going concern FS not prepared on a going concern basis.

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Accrual Basis of Accounting, Materiality & Aggregation

Accrual Basis of Accounting – should be applied in the preparation of financial statements, except for the cash flow statement.

Materiality and AggregationEach material item should be presented separately in the

financial statements.

Immaterial items should be aggregated with amounts of a similar nature and function and need not be presented separately.

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Continued – Accrual Basis…Materiality – Information is material if its non-disclosure could

influence the economic decision of users. Materiality depends on the size and nature of the item.

“IASs are not intended to apply to immaterial items.”Examples Individual related party transactions might be disclosed

even though the amounts involved are immaterial. Information about a new segment might be relevant,

irrespective of size, since it may affect the assessment of risks and opportunities facing the entity.

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Offsetting

Offsetting – Assets and liabilities should not be offset unless offsetting is specifically required or permitted by another IAS.

Income and expense items are to be offset only when:

an IAS requires or permits offsetting: or gains, losses and related expenses arising from similar

transactions are not material in which case these amounts should be aggregated.

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Accounting Policies

Accounting policies must ensure that the financial statements comply with all applicable IAS and SIC Interpretations.

Where there is no IAS, the accounting policies selected must be such that the information included in the financial statements is:

relevant to users’ decision making needs; and reliable, they are neutral and reflect the economic

substance of transactions

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Continued – Accounting Policies…

Where there is no IAS, select policies with regard to: IASs dealing with similar issues IASC Framework Industry practice and pronouncement of other standard

setters But no requirement to refer to IAS Exposure Drafts

Accounting policies should describe: The measurement basis (bases) used in preparing the

financial statements (historical cost, current cost, realizable value, fair value, or present value),

Any specific accounting policy that is necessary for a proper understanding of the financial statements.

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Continued – Accounting Policies

An entity may consider presenting the following accounting policies:

Revenue recognition Consolidation principles, incl. Subsidiaries and associates Business combinations Joint ventures Recognition and depreciation/amortization of tangibles

and intangibles Capitalization of borrowing costs and other expenditures Construction contracts Investment properties

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Continued – Accounting Policies

Financial instruments and investments Leases Research and development costs Inventories Taxes Provisions Employee benefit costs Foreign currency translation and hedging Basis of segment reporting Definition of cash and cash equivalent Inflation accounting Government grants

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Consistency of Presentation

The presentation and classification of items in the financial statements should be retained from one period to the next unless:

the enterprise significantly changes the nature of its operation; or

a change is required by an IAS or SIC Interpretation.

When a change in presentation is made, comparative information must be reclassified.

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Continued – Consistency…

If more than one accounting policy is available under an IAS or Interpretation, one of these must be chosen and applied consistently unless the IAS or Interpretation specifically requires or permits categorization of items.

If a Standard requires or permits categorization of items, the most appropriate accounting policy should be selected and applied consistently to each category.

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Comparative Information

Comparative numerical information for the previous period is required to be disclosed unless such disclosures is exempted by another IAS.

Reclassify comparative amounts if the presentation or classification of items in the financial statements is amended.

The nature, amount of and reason for any reclassification should be disclosed.

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Compliance with IASs

An enterprise whose FS comply with IAS must disclose that fact.

All standards and interpretations must be complied with. No longer:– “comply with IASs in all material respects”– “comply with the significant requirements of

IASs”– “are based on IASs”

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Fair Presentation

A fair presentation of FS is, in virtually all cases, achieved by an appropriate application of IASs.

Fair presentation Override

If compliance with an IAS would be misleading, departure from that standard is required – only in extremely rare circumstances.

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Continued – Fair Presentation

Comprehensive disclosures requirements include:

a.) that management has concluded that the financial statements fairly present the enterprise’s financial position, financial performance and cash flow,

b.) that it has complied in all material respects with applicable IAS except that it has departed from a Standard in order to achieve a fair presentation,

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Continued – Fair Presentation

c.) the Standard from which the enterprise has departed, the nature of the departure, including the treatment that the Standard would require, the reason why that treatment would be misleading in the circumstances and the treatment adopted and

d.) the financial impact of the departure on the enterprise’s net profit or loss, assets, liabilities, equity and cash flows for each period presented.

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Early Application of International Accounting Standards

When an enterprise applies an IAS before its effective date, that fact must be disclosed in the FS.

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SIC-8 First-Time Application of IASs

Prepare as if the FS had always been prepared with IASs and SICs effective for the period of first-time application.

Apply IASs and SICs retrospectively, unless:– Different treatment permitted/required in individual

IASs/SICs or– Adjustment cannot be reasonably determined.

Restate comparative information unless impracticable.

Adjust opening retained earnings of earliest period presented.

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SIC-8 First-Time Application of IASs

Disclosure requirements:– the fact that the amount of the the adjustment

to the opening balance of retained earnings cannot be reasonably determined;

– the fact that it is impracticable to provide comparative information, and

– the policy selected for each IAS that permits a choice of transitional accounting policies.

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Balance Sheet: Current/Non-current Distinction

Present assets and liabilities on the face of the BS as:– using a current/non-current classification; or– broadly in order of their liquidity.

Whichever method is chosen:– Disclose amounts due for recovery or settlement

after more than 12 months for each asset and liability item.

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Current Assets

Current assets are: assets expected to be realized, consumed or disposed of

in the normal course of the enterprise’s operating cycle; or

Assets held primarily for trading purposes or the short-term and expected to be realized within 12 months of balance sheet date; or

Cash or cash equivalent assets not restricted in use.

Current assets include cash and cash equivalents that are not restricted in their use.

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Current Liabilities

Short-term debt should be classified as non-current if– the original term was over 12 months,– there is an intention to re-finance, and– a refinancing agreement is completed before

authorization of the financial statements.

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Current Liabilities

Current liabilities are liabilities:– expected to be settled in the normal course of

the enterprise’s operating cycle; or– due to be settled within 12 months of the

balance sheet date.

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Long-term Interest Bearing Liabilities

Long-term interest bearing liabilities should continue to be classified as non-current, even if they are due for settlement within 12 months from the balance sheet date, provided that the original term was more than 12 months and the enterprise has the intention and ability to “ roll over” the obligation.

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Balance Sheet: Minimum Information

Item that must, at a minimum, be presented on the face of the balance sheet:– Property, plant and equipment– Intangible assets– Financial assets– Equity investment– Inventories– Trade and other receivable

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Continued – Balance Sheet…

– Cash and cash equivalents– Issued capital and reserves– Minority interest– Non-current interest bearing liabilities– Provisions– Tax liabilities and assets– Trade and other payables

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Additional Information Disclosed on the Face of the Balance Sheet or in the Notes

Further sub-classifications of the line items can be disclosed either– on the face of the balance sheet or– in the notes to the balance sheet.

Separately present amounts payable to and receivable from parent, subsidiaries, associates and other related parties.

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Detailed Disclosures

Detailed disclosures relating to equity line items are also required. They can be made either on the face of the balance sheet or in the notes to the balance sheet.

Comprehensive disclosure regarding equity items:– For each class of share capital (face or notes):

o Number of shares authorizedo Number of shares issued and fully paido Number of shares issued and not fully paid

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Continued – Detailed Disclosures

o Par value or no-par valueo A reconciliation of movements in number of

shareso Rights, preferences and restrictionso Treasury shareso Shares held for options and sale contracts

- Nature and purpose of each equity reserve- Proposed dividends- Cumulative preference dividends not recognized.

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Income Statement: Minimum Information

Items that must, as a minimum, be presented on the face of the income statements:– Revenue– Results from operating activities– Finance costs– Share of profits and losses of associates and joint

ventures accounted for using the equity method

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Continued – Income…

– Tax expense– Profit or loss from ordinary activities– Extraordinary items– Minority interest– Net profit and loss for the period

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Additional Information Disclosed on the Face of the Income Statement or in the Notes

Additional Information Disclosed on the Face of the Income Statement or in the Notes– an analysis of expanses using a classification based on

either the nature of expenses or their function.

When the nature of expense method is used, expenses are aggregated in the income statement according to their nature (e.g., depreciation, transportation, salaries and wages, advertising expense).

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Continued – Additional Info… Example: Income statement: Nature of expenses method

Revenue x

Other operating income x

Changes in inventories of finished goods & work in process x

Raw materials and consumables used x

Staff costs x

Depreciation and amortization x

Other operating expenses x

Total operating expenses (x)

Profit from operating activities x

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Continued – Additional Info…

When the cost of sales method or function of expenses method is used, expenses are classified according to their functions as part of cost of sales, distribution or administrative activities. Additional disclosure required about the nature of expenses, including depreciation, amortization and staff costs.

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Income statement: Function of expenses

Example: Income statement: Function of expenses

Revenue XCosts of sales (x)Gross profit XOther operating income XDistribution costs (x)Administrative expenses (x)Other operating expenses (x)Profit from operating activities X

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Continued – Income statement

The enterprise must also disclose the amount of dividends per share (declared or proposed) for the period.

The earnings per share should also be shown on the face of the income statement. This only applies to enterprises whose ordinary shares are publicly traded.

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Changes in Equity

IAS 1 requires the presentation of a statement (or as a separate component of the financial statements) showing either:– All changes in equity, or– Changes other than those arising from capital

transactions with owners and distributions to owners.

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Continued – Changes in Equity

The statement should show the change in equity for the period resulting from:– net profit or loss for the period– income, expenses, gains and losses (including

prior period adjustments) recognized directly in equity; and total of these items, and

– the cumulative effect of changes in accounting policies and the correction of fundamental errors.

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Continued – Changes in Equity

Other changes in equity must also be disclosed either as part of the statement or in the notes:

capital transactions with owners and distributions to owners,

the balance of accumulated profit or loss at the beginning of the period and at the balance sheet date and the movements for the period, and

a reconciliation of changes in:– each class of equity– share premium– each reserve

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Notes to the Financial Statements

The notes to the Financial Statement should be presented in systematic order, and cross-referenced to the balance sheet, income and cash flow statement.

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Continued – Notes to…The notes are normally presented in the following

order:1. Statement of compliance with IASs.2. Statement of measurement bases and accounting policies3. Supporting items for information presented in the basic statements4. Other disclosures, including:

a. Contingencies, commitments and other financial disclosure, and

b. Non-financial disclosure.The notes should:

– Present basis of preparation and accounting policies (including measurement basis)

– Information required by IASs.– Additional useful information not presented elsewhere.

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Other Disclosures

If not disclosed elsewhere in information published with the financial statements, the enterprise must disclose the following:– the domicile and legal form of the enterprise, its

country of incorporation and the address of– registered office (or, if different, the address of its

principal place of business);– a description of its operations and principal activities;– the name of its parent enterprise and ultimate parent

enterprise; and– either the number of employees at the end of the

period or the average for the period.

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