OVERVIEW OF IAS-1 Presentation of Financial Statements

Objective

To prescribe the basis for presentation of general purpose financial statements by setting out

• overall considerations
• guidelines for structure
• minimum requirements for content.

1 SCOPE

1.1 General purpose financial statements

Meaning

Financial statements intended to meet the needs of users who are not in a position to demand reports tailored to specific information needs.

May be presented separately or within another public document (eg annual report or prospectus).

1.2 Application

To financial statements of individual enterprises and consolidated financial statements of groups.

To all types of enterprises including banks, insurance and other financial institutions.

To enterprises with a profit objective (including public sector business enterprises).

2 FINANCIAL STATEMENTS

2.1 Representation

2.2 Objective (see the Framework)

• To provide information useful to a wide range of users in making economic decisions about:
• financial position      ie assets, liabilities, equity
• performance      I&E (incl losses and gains)
• cash flows

and, To show the results of management’s stewardship.

2.3 Responsibility

Board of directors and/or governing body of an enterprise is responsible for the preparation and presentation of financial statements.

2.4 Components

A complete set of financial statements includes

Balance sheet (BS)

Income statement (IS) or profit and loss account (P&L a/c)

A statement showing either

• all changes in equity or
• changes in equity other than
• those arising from capital transactions with owners
• distributions to owners

Cash flow statement (CFS)

Accounting policies and explanatory notes

2.5 Supplementary statements

Enterprises are encouraged to present additional information, eg

• a financial review by management
• environmental reports
• value added statements.

3 OVERALL CONSIDERATIONS

3.1 Fair presentation and compliance with IASs

Financial statements should "present fairly"

• financial position
• financial performance
• cash flows.

Achieved by appropriate application of IASs (+ necessary additional disclosure).

Compliance with IASs should be disclosed.

Inappropriate accounting treatments are NOT rectified by

• disclosure of accounting polices used
• notes or explanatory material.

If compliance would be misleading (in extremely rare circumstances) the nature of departure from a Standard and its financial impact must be disclosed.

Where an IAS is applied before its effective date, that fact should be disclosed.

3.2 Accounting policies

"Definition"

Specific principles, bases, conventions, rules and practices adopted by an enterprise in preparing and presenting financial statements.

Accounting policies should be selected and applied so that

Financial statements comply with IASs (where applicable)

Where there is no specific requirement, financial statements are

• relevant to users
• reliable, ie
• represent faithfully results and financial position
• reflect economic substance (not merely the legal form)
• are neutral (ie free from bias)
• are prudent
• are complete in all material respects.

3.3 Going concern

Management should

• assess the enterprise’s ability to continue as a going concern (considering all information available for the foreseeable future)
• prepare financial statements on a going concern basis (unless it is probable that the enterprise will be liquidated/cease trading)
• disclose material uncertainties which may affect the going concern concept.

When financial statements are not prepared on a going concern basis, that fact should be disclosed, together with the basis on which the financial statements are prepared and the reason for departing from the going concern concept.

"Foreseeable future"

Normally at least, but not limited to, 12 months from the balance sheet date.

3.4 Accrual basis of accounting

An enterprise should prepare its financial statements (except CFS) under the accrual basis of accounting.

3.4.1 Concept

Assets, liabilities, equity, income and expenses

• are recognised when they occur (not as cash or its equivalent is received or paid) and
• are recorded in the accounting records and reported in the financial statements of the periods to which they relate.

3.4.2 "Matching" concept

Expenses are recognised on the basis of a direct association between

• costs incurred and
• earning of specific items of income.

3.5 Consistency of presentation

Presentation and classification of items in financial statements should be retained from one period to the next.

Exceptions

The change will result in a more appropriate presentation (eg if there is a significant change in the nature of the enterprise’s operations).

A change is required by an IAS or an SIC interpretation.

3.6 Materiality and aggregation

Framework definition

Information is material if its non-disclosure could influence the economic decisions of users taken on the basis of financial statements

Present separately in financial statements.

Aggregate with amounts of similar nature or function (on face of financial statements or in notes) Need not be presented separately.

3.7 Offsetting

3.7.1 Assets and liabilities

Should NOT be offset except when
required or permitted by another IAS.

3.7.2 Items of income and expense

SHOULD be offset when

• required or permitted by an IAS
• gains, losses and related expenses arising from the same or similar transactions and events are not material. Such amounts should be aggregated and presented as above (see immaterial amounts).

3.7.3 General

Any offsetting, except when it reflects the substance of the transaction or event, detracts from the ability of users to understand the transactions undertaken and to assess the future cash flows of the enterprise.

Reporting of assets net of valuation allowances (eg obsolescence on inventories and doubtful debts on receivables) does not constitute offsetting.

3.8 Comparative information

DISCLOSE unless an IAS permits/requires otherwise

· INCLUDE when relevant to understanding current period’s financial statements, eg re legal disputes

When the presentation/classification of items in the financial statements is amended

• if practicable, reclassify comparatives and disclose nature, amount and reason for reclassification
• if impracticable, disclose reason for not reclassifying and the nature of the changes that would otherwise have been made

4 STRUCTURE AND CONTENT

4.1 "Disclosure"

IAS 1 uses the term in a broad sense, encompassing items presented on the face of each financial statement as well as in the notes to the financial statements.

4.2 Identification of financial statements

Financial statements should be clearly identified and distinguished from other information in the same published document (eg annual report or prospectus).

4.2.1 Importance

IASs apply only to the financial statements and not to other information so users must be able to distinguish information prepared using IASs from other information not subject to accounting requirements.

4.2.2 Information to be prominently displayed

Component of the financial statements presented (eg balance sheet)

Name of reporting enterprise

Whether financial statements cover individual enterprise or a group

Balance sheet date or the period covered by the financial statements (as appropriate)

Reporting currency

Level of precision used (eg 000, millions, etc).

4.3 Reporting date and period

Financial statements should be presented at least annually.

Additional disclosure for periods more or less than one year

• reason for a period other than one year being used
• fact that comparative amounts for the income statement , changes in equity, CFS and related notes are not comparable.

4.4 Timeliness

An enterprise should be in a position to issue its financial statements within six months of the reporting date.

Complexity of operations is not a reason for failing to report on a timely basis.

5 BALANCE SHEET

5.1 The current/non-current distinction

5.1.1 Terminology

"Non-current" – includes tangible, intangible, operating and financial assets of a long-term nature.

Operating cycle – time between acquisition of materials entering into a process and its realisation (as cash).

5.1.2 Presentation

An enterprise should determine whether or not to present current and non-current assets and current and non-current liabilities as separate classifications on the face of the balance sheet.

Separate classification

• distinguishes net assets that are continuously circulating as working capital from those used in long-term operations
• highlights assets expected to be realised within the current operating cycle, and liabilities due for settlement in the same period.

When an enterprise chooses not to make this classification, assets and liabilities should be presented broadly in line with their liquidity.

Other useful information

• maturity dates of trade and other receivables and payables
• inventories expected to be recovered more than one year from the balance sheet date.

5.2 Current assets

An asset should be classified as "current" when it is

• expected to be realised, or is held for sale or consumption, in the normal course of the operating cycle, or

• held primarily for trading purposes or for the short-term and expected to be realised within 12 months of the balance sheet date, or

• cash or a cash equivalent which is not restricted in use.

All other assets should be classified as "non-current".

Illustration – Nestlé 1997

9. Trade and other receivables

5.3 Current liabilities

A liability should be classified as "current" when it is

• expected to be settled in the normal course of the operating cycle

• due to be settled within 12 months of the balance sheet date.

All other liabilities should be classified as "non-current".

5.4 Information to be presented on the face of the balance sheet

5.4.1 Minimum requirements for line items

Property, plant and equipment

Intangible assets

Inventories

Trade and other receivables

Cash and cash equivalents

Trade and other payables

Tax liabilities

Provisions

Non-current interest-bearing liabilities

Issued capital and reserves.

5.4.2 Additional line items

Headings and sub-totals may be required by an IAS, or to "present fairly" the financial position.

5.5 Information either on the face of the balance sheet or in the notes

Further sub-classifications of each line items presented, by nature.

Examples

• Intangibles (per IAS 38)
• Tangible assets by class (per IAS 16)
• Receivables analysed between
• trade customers
• other group
• related parties
• prepayments
• Inventories (per IAS 2) eg
• merchandise
• production supplies
• materials
• WIP
• finished goods.
• Provisions eg employee benefit costs
• Equity capital and reserves
• classes of paid in capital
• share premium
• reserves.

For each class of share capital

• number of shares authorised
• number of shares issued and fully paid, and issued but not fully paid
• par value per share (or that the shares have no par value)
• a reconciliation of the number of shares outstanding at the beginning and end of the year
• rights, preferences and restrictions (eg concerning distribution of dividends and repayment of capital)
• own shares (ie shares in the enterprise held by the enterprise)
• shares reserved for issuance under options (incl terms and amounts)

6 INCOME STATEMENT

6.1 Information to be presented on the face of the income statement

6.1.1 Minimum requirements for line items

Revenue

Results of operating activities

Finance costs

Tax expense

Profit or loss from ordinary activities

Extraordinary items

Net profit or loss for the period.

6.1.2 Additional line items

Headings and sub-totals may be required by an IAS, or to "present fairly" financial performance.

6.2 Information either on the face of the income statement or in the notes

An analysis of expenses using a classification based on either

• nature, or
• function.

Expense items are further sub-classified in one of two ways

6.2.1 Nature of expenditure method

Expenses are aggregated by nature eg

• depreciation
• purchases of materials
• transport costs
• wages and salaries
• advertising costs.

and are not reallocated to functions.

Advantages

• Simple to apply in many small entities
• No arbitrary allocations, therefore
• More objective
• Less judgement required.

Illustration – Nature of expense method

6.2.2 Cost of sales method

Classifies expenses as

• cost of sales
• distribution
• administrative activities.

Advantage

• Provides more relevant information to users

Disadvantage

• Cost allocation can be arbitrary and involves considerable judgement.

Illustration – Function of expenditure method

Source: House of Fraser consolidated profit and loss account for 52 weeks ended 25 January 1997

6.2.3 Additional disclosure required when cost of sales classification is used

Nature of expenses including

• depreciation
• amortisation
• staff costs.

6.2.4 Dividends

Disclose amount per share, paid and proposed, for the period covered by the financial statements

7 CHANGES IN EQUITY

7.1 A separate statement

Net profit or loss for the period

Each item of income and expense, gain or loss recognised directly in equity, and total thereof

Cumulative effect of changes in accounting policy and the correction of fundamental errors (per IAS 8 benchmark treatments).

7.2 Within the statement or in notes

Capital transactions with/distributions to owners

Accumulated profit or loss

• balance at beginning of period
• balance at balance sheet date
• movements for period

A reconciliation between carrying amount of

• each class of equity
• share premium
• each reserve.

8 NOTES TO THE FINANCIAL STATEMENTS

8.1 Structure

8.1.1 Objectives

To present information about

• the basis of preparation of the financial statements
• specific accounting policies selected and applied for significant transactions and events.

To disclose information required by IASs that is not presented elsewhere.

To provide additional information which is not presented on the face of the financial statements but is necessary for a fair presentation.

8.1.2 Presentation

In a systematic manner.

Each item on the face of the balance sheet, income statement and CFS should be cross-referenced to notes.

8.1.3 Normal order

Statement of compliance with IASs

Statement of measurement basis and accounting policies applied

Supporting information for items presented on the face of each financial statements in order of presentation

Other disclosures, including

• contingencies, commitments and other financial disclosures
• non-financial disclosures.

8.2 Presentation of accounting policies

8.2.1 Matters to be described

Measurement basis (or bases) used

Each specific accounting policy that is significant to a fair presentation.

8.2.2 Accounting policies to be considered

Revenue recognition (see IAS 18)

Consolidation principles*

Business combinations*

Joint ventures*

Recognition and depreciation/amortisation of tangible (see IAS 16) and intangible assets (see IAS 38)

Capitalisation of borrowing costs and other expenditure*

Construction contracts*

Investment properties*

Financial instruments and investments*

Leases*

Research and development costs (see IAS 38)

Inventories (see IAS 2)

Taxes, including deferred taxes*

Provisions (see IAS 37)

Employee benefit costs*

Foreign currency translation and hedging*

Definition of business and geographical segments*

Inflation accounting*

Government grants*

* IASs not examinable at Foundation Stage

8.3 Other disclosures

Concerning the enterprise

• Domicile and legal form
• Country of incorporation
• Address of registered office (or principal place of business, if different)
• Description of nature of operations and principal activities
• Name of parent and the ultimate parent

Average number of employees during the period.