IAS 1 Presentation of Financial Statements prescribes the basis for the presentation of general purpose financial statements to ensure comparability both with the entity’s financial statements of previous periods and with the financial statements of other entities.
It sets out overall requirements for the presentation of financial statements, guidelines for their structure, and minimum requirements for their content.
True and fair view
Financial statements should present fairly the financial position, financial performance, and cash flows of the entity.
Comparative information for the immediately preceding accounting period should be disclosed (you will not be asked to provide comparative information).
Each component of the financial statements must be properly identified with the following information displayed prominently:
- The name of the reporting entity.
- The date of the end of the reporting period or the period covered by the statement, whichever is appropriate.
- The currency in which the figures are reported.
- The level of rounding used in the figures (for example, whether the figures are thousands of rupees or millions of rupees).
IAS 1 does not specify what the statements must be called and allows the use of other terminology. For example, a statement of financial position is often called a balance sheet, and a statement of profit or loss is often called an income statement.
REQUIREMENTS AS TO STATEMENT OF FINANCIAL POSITION
Current and non-current assets
IAS 1 states that an asset should be classified as a current asset if it satisfies any of the following criteria:
- The entity expects to realize the asset, or sell or consume it, in its normal operating cycle.
- The asset is held for trading purposes.
- The entity expects to realize the asset within 12 months after the reporting period.
- It is cash or a cash equivalent unless the asset is restricted from being used for at least 12 months after the reporting date. (Note: An example of ‘cash’ is money in a current bank account. An example of a ‘cash equivalent’ is money held in a term deposit account with a bank.)
All other assets should be classified as non-current assets.
This definition allows inventory or trade receivables to qualify as current assets, even if they may not be realized into cash within 12 months, provided that they will be realized in the entity’s normal operating cycle or trading cycle.
Current and non-current liabilities
IAS 1 also states that liability should be classified as a current liability if it satisfies any of the following criteria:
- The entity expects to settle the liability in its normal operating cycle.
- The liability is held primarily for the purpose of trading. This means that all trade payables are current liabilities, even if settlement is not due for over 12 months after the end of the reporting period.
- It is due to be settled within 12 months after the end of the reporting period.
- The entity does not have the unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period.
All other liabilities should be classified as non-current liabilities.
If a company obtains a five-year bank loan, where none of the loan principal is repayable until
At the end of the loan period, the loan will be a non-current liability for the first four years and will
then become a current liability in the fifth year when it is repayable within 12 months.
Accrued expenses (and deferred income) are current liabilities as these are monies due to a third party but not yet paid; for example, wages payable
The operating cycle of an entity is the time between the acquisition of assets for processing and their realization in cash or cash equivalents. When the entity’s normal operating cycle is not clearly identifiable, it is assumed to be twelve months. This is almost always the case.
Minimum face items
IAS 1 provides a list of items that, as a minimum, must be shown on the face of the statement of financial position as a ‘line item’ (in other words, on a separate line in the statement):
- Property, plant, and equipment
- Investment property
- Intangible assets
- Long-term investments
- Investment in associate
- Biological assets
- Trade and other receivables
- Cash and cash equivalents.
- Trade and other payables
- Financial liabilities, loans, etc.
- Current tax liabilities (but possibly assets)
- Deferred tax liabilities (but possibly assets). These are always non-current.
Issued capital and reserves are attributable to the owners of the entity. (The term ‘owners’, refers to the equity holders.)
Additional line items
Additional line items should be included in the statement of financial position when presenting them separately and are relevant to an understanding of the entity’s financial position.
Face or Notes
Some of the line items in the statement of financial position should be sub-classified into different categories, giving details of how the total figure is made up. This sub-classification may be presented either:
- as additional lines on the face of the statement of financial position (adding up to the total amount for the item as a whole) or
- in notes to the financial statements.
- Tangible non-current assets should be divided into sub-categories, as required by IAS
- Receivables should be sub-classified into trade receivables, receivables from related
parties, prepayments, and other amounts.
- Inventories are sub-classified in accordance with IAS 2 into categories of materials, work
in progress and finished goods.
REQUIREMENTS AS TO STATEMENT OF COMPREHENSIVE INCOME
A single statement or two statements
This statement provides information about the performance of an entity in a period. It consists of two parts:
- A statement of profit or loss – a list that summarizes the revenues, costs and expenses incurred during a specified period which result in a profit or loss for the period; and
- Statement of other comprehensive income – a list of other gains and losses that have arisen in the period.
The statement of comprehensive income shows the performance of the business in terms of its main activities. It is a structured presentation of all revenue, other income earned in a period, and the costs of earning those.
IAS 1 allows an entity to present the two sections in a single statement or in two separate statements. If two separate statements are used, they should include all the information that would otherwise be included in the single statement of comprehensive income.
Total comprehensive income
Total comprehensive income during a period is the sum of:
- The profit or loss for the period and
- Other comprehensive income.
Minimum face items
As a minimum, IAS 1 requires that the statement of comprehensive income should include line items showing the following amounts for the financial period:
- Finance costs (for example, interest costs)
- Tax expense
- Profit or loss
- Each component of ‘other comprehensive income
- Total comprehensive income.
Additional line items
Additional line items should be presented on the face of the statement of comprehensive income when it is relevant to an understanding of the entity’s financial performance.
Face or Notes
The following information may be shown either on the face of the statement of comprehensive income or in a note to the financial statements:
- Material items of income and expense
- An analysis of expenses, providing either:
- Expenses analysed by their nature, or
- Expenses analysed by the function that has incurred them.
Examples of material items
Material items that might be disclosed separately include:
- A write-down of inventories from cost to net realisable value, or a write-down of items of property, plant and equipment to recoverable amount
- The cost of a restructuring of activities
- Disposals of items of property, plant and equipment
- Discontinued operations
- Litigation settlements
- A reversal of a provision
Analysis of expense by nature
When expenses are analyzed according to their nature, the categories of expenses will vary according to the nature of the business.
In a manufacturing business, expenses would probably be classified as:
- Raw materials and consumables used;
- Staff costs (‘employee benefits costs’); and
Items of expense that are immaterial are presented as ‘other expenses’.
There will also be an adjustment for the increase or decrease in inventories of finished goods and work-in-progress during the period.
Other entities (non-manufacturing entities) may present other expenses that are material to their business.
Analysis of expense by function
When expenses are analyzed according to their function, the functions are common ‘cost of sales’, ‘distribution costs’, ‘administrative expenses’, and ‘other expenses’. This method of analysis is also called the ‘cost of sales method’. In practice, most entities use this method.