Requirements for preparing the financial statements are prescribed by IAS 1 Presentation of Financial Statements. As per the standard set by IAS 1, complete set of financial statements should include a statement of profit and loss, a statement of financial position, a statement of cash flows and a statement of changes in equity. These guidelines for presentation make it easier to make a comparison between the financial statements of one entity with another over the previous years. International accounting standards 1 has set clear guidelines regarding the structure of financial statements and different concepts like going concerns, current/non-current distinction and the accrual basis for accounting.
Scope of IAS 1
International accounting standard 1 applies to all financial statements and must comply with International Financial Reporting Standards (IFRS). [IAS 1.2]
What Is The Objective of IAS 1 Financial Statements?
According to Script Consultants, The purpose of IAS 1 financial statements is to give information about an entity’s financial position, financial performance and cash flows. The financial statements are prepared for different users to help them in making their economic decisions. Financial statements include assets, liability, equity, income and expenses, contributions by and distributions to owner and cash flows. [IAS 1.9]
Different Components of Financial Statements
As per IAS 1.10, the following makes a complete set of financial statements:
- Balance sheet or a statement of financial position.
- A statement of profit or loss.
- A statement of changes in equity.
- Cash flows statement.
- Information for comparison.
Presentation of Financial Statements and Its Compliance with IFRS
There must be a fair presentation of all the components of financial statements. Fair representation includes an honest representation of:
- Effects of transactions.
- All conditions related to assets, incomes, expenses and liabilities according to international accounting standards.
- Application of IFRSs to financial statements.
The compliance with IFRS needs the financial statements means that the entity must follow the requirements such as International Financial Reporting Standards, International Accounting Standards, IFRIC Interpretations and SIC Interpretations. The IFRS financial statements must include notes stating the compliance. [IAS 1.6]
If the compliance with IFRS requirement does not allow the entity to present the financial statement according to their objective or it can misleading, in such extreme or rare cases, the entity can avoid IFRS requirement. But the entity is required to disclose the reason, nature and impact of this departure from IFRS Foundation.
This is mentioned in IAS 1.19-21.
Must Read About: International Integrated Reporting Council (IIRC)
Different Concepts of Accounting By IAS
While preparing the financial statements, it is assumed that the company will remain in operation in foreseeable future. [Conceptual Framework, para 4.1]
Here the management has to:
- Make an assessment of an entity’s ability to continue.
- Disclose the uncertainties.
- Disclose if the entity is not a going concern.
Accrual Basis of Accounting
According to this concept, the business may recognize revenue when earned and expenses are recognized when the assets are consumed. IAS 1.27 mentions that entity can prepare its financial statements, expect for cash flow information.
When a business decides to use a specific presentation method, it should continue using that for next years as well. This ensures easy comparison of financial statements for various years. They must change the method only because of certain circumstances or change in IRFS’s requirement. [IAS 1.45]
Materiality and Aggregation Concept
The transactions that have the capacity to alter the decision of the readers must be recorded by the entity. [IAS 1.7]
There should be a segregation of different material classes with similar items. In case the items are individually immaterial, they can be aggregated together.
The assets cannot offset liabilities and income cannot offset expenses until and unless permitted by IFRS. [IAS 1.32]
Comparative Information of IAS 1
All the comparative information must be disclosed as per the requirement of IAS 1. All the transactions of all the amounts for the previous year must be reported in financial statements and notes.
At least two of the given financial statements are required for providing comparative information: [IAS 1.38]
- Financial position statement.
- Profit or loss statement.
- Separate statements of profit or loss.
- Cash flows statement.
- Changes in equity.
- Notes related to above-given items.
IAS 1 Prescribed Structure and Content For Financial Statements
According to IAS 1.49-51, the entity is required to identify:
- The financial statements, which must be different from other information-containing documents.
- Each financial statement and the notes related to them.
In addition, the content must have:
- Name of an entity or even if there is some change in the name.
- Information whether the financial statement is an individual entity or a group of entities.
- Details about the reporting period.
- The currency used.
- Level of rounding used such as thousands or millions.
It is assumed that the financial statements are prepared annually. In case the business decides to change this period, it has to mention the reason for the change. [IAS 1.36]
Balance Sheet or Statement of Financial Position
Current and Non-Current Classification
There should be a clear classification of current and non-current assets and liabilities in a financial statement.
Current assets [IAS 1.66] are the assets that will be realized in normal operating cycle of the entity. These assets are used for the purpose of trading. They can be cash or cash equivalents. Within 12 months after the reporting period, they are expected to be realized. Assets that do not fulfil these criteria are categorized as non-current assets.
Current liabilities [IAS 1.69] are due to be settled within 12 months. Just like current assets, they are expected to be settled within the normal operating cycle of the entity and are used for trading purpose. There is no right of the entity on current liabilities at the end of the reporting period.
- The long term debt is classified as non-current if it is expected to be refinanced under any current loan facility.
- The liability is considered to be current if it becomes payable on demand. It can happen if the entity breaches a long-term loan agreement.
- Liability is classified as non-current, of the lender provides a period of at least 12 months grace period.
The line items mentioned in IAS 1.54 are property, plant and equipment, intangible assets, investment property, financial assets, biological assets, inventories, trade and other receivables, cash and cash equivalents, assets for sale, trade and other payables, provisions, financial liabilities, current tax liabilities and assets, deferred tax liabilities and assets, disposal groups liabilities, non-controlling interests and issued capital and reserves.
In the financial statement or in notes, the sub-classification of line items can be: disaggregation of receivables, classes of property, plant and equipments, disaggregation of inventories, classes of equity and reserves and disaggregation of provisions for benefit of employees.
Format of Statement
There is no specific format for preparing the financial statement. When it comes to assets, current or non-current assets, anything can come first. Similarly the position of current and non-current can be determined as per the requirement of business. One widely used format is fixed assets+ current assets-short term payables= long-term debt+ equity.
Disclosures Required Regarding Share Capitals and Reserves [IAS 1.79]
- Par value of shares
- Number of shares (authorized, issued and fully paid, issued but not fully paid)
- Rights, preferences and restrictions
- Number of outstanding shares
- Treasury shares
- Shares that are kept in reserve for issuance under options and contracts
- Nature and purpose of each reserve
Profit or Loss Statement
The total of income minus expenses determines the profit or loss. The components of other comprehensive income are excluded while calculating the profit or loss. The other comprehensive income includes the items (income or expenses) that are not considered as profit or loss by IFRSs. Total comprehensive income for a given time period is equal to profit or loss plus other comprehensive income.
Choices available for presentation of profit or loss statement
There are two choices of presentation that an entity can choose:
- Financial position of an entity can be presented through a single statement of profit or loss and other comprehensive income. In this there can be two sections for profit or loss and other comprehensive income.
- Two statements can also be chosen by an entity i.e. a separate statement of profit or loss and a separate statement of comprehensive income.
The line items such as revenue, finance costs, tax expense, any gain or loss due to de-recognition financial assets, any gain or loss due to reclassification of financial assets must be included in profit or loss section. [IAS 1.82-82 A]
Disposals of investments, litigation settlements, discontinuing operations, disposals of items of plant, property and equipment, restructuring of activities and other reversals of provisions are some of the examples of items that must be disclosed in the comprehensive income statement or in notes separately.
Statement of changes in equity
According to the requirement of IAS 1, a statement of equity must show:
- Total comprehensive income for the period.
- Any effects of the application of accounting policies and restatements.
- The reconciliation of amounts for each component of equity that were recorded in the beginning and end of the period should disclose profit or loss, other comprehensive income and transactions with owners.
- In the statement of change in equity or notes, amount of dividends and related amount per share can also be presented.
Notes to the financial statements
According to IAS 1.112, the notes:
- Contain all the information related to basis of preparation of financial statement and the use of accounting policies.
- Disclose the important information that cannot be found anywhere in the financial statement.
- Provide any additional information, if required.
According to IAS 1.114, the order of the notes can be presented in the following manner:
Firstly, the statement that financial statement complies with IFRSs.
- Summary of used accounting policies.
- Supporting information related to balance sheet, profit or loss statement, cash flow statement and so on.
- Disclosures such as contingent liabilities and non-financial aspects like financial risk management policies and objectives.
Judgments and Key Assumptions
The judgment made by the management while applying the accounting policies in the presentation of financial statements and its effect on the amounts should be disclosed. [IAS 1.122]
The entity must disclose the following information in the statement of change in equity: [IAS 1.137]
- The proposed amounts of dividends that were declared before preparing the financial statement but not recognized as a distribution to the owner.
- Total cumulative preference dividends.
Disclosures Related To Capital
According to IAS 1.135, the entity must disclose the following details about the capital:
- What is the objective, processes and policies of entity in order to manage the capital?
- What changes happened from one period to another?
- What is the nature and description of capital requirement?
- How the entity is meeting its objectives?
- Is the entity complying with all the requirements?
- What is the quantitative data available for the capital?
Other Information To Be Disclosed:
While presenting the financial position of entity through financial statements, the following information can also be disclosed:
- Information related to principal activities and operations
- Legal form of entity
- Country and address of the registered office
- Name of the parent group, if any.
- Length of life, if the entity has a limited life
International accounting standards 1 has set some requirements for the proper presentation of the financial position of any entity. The above-mentioned points can be helpful in understanding the requirements for different financial statements in an easy and concise way.