PAS/IAS 1

SUMMARY OF IAS 1

Objective of IAS 1

The objective of IAS 1 (revised 1997) is to prescribe the basis for 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. IAS 1 sets out the overall framework and responsibilities for the presentation of financial statements, guidelines for their structure and minimum requirements for the content of the financial statements. Standards for recognising, measuring, and disclosing specific transactions are addressed in other Standards and Interpretations.

Scope

Applies to all general purpose financial statements based on International Financial Reporting Standards. [IAS 1.2]

General purpose financial statements are those intended to serve users who do not have the authority to demand financial reports tailored for their own needs. [IAS 1.3]

Objective of Financial Statements

The objective of general purpose financial statements is to provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions. To meet that objective, financial statements provide information about an entity's: [IAS 1.7]

• Assets.
  
• Liabilities.
  
• Equity.
  
• Income and expenses, including gains and losses.
  
• Other changes in equity.
  
• Cash flows.
  

That information, along with other information in the notes, assists users of financial statements in predicting the entity's future cash flows and, in particular, their timing and certainty.

Components of Financial Statements

A complete set of financial statements should include: [IAS 1.8]

• a balance sheet,
  
• income statement,
  
• a statement of changes in equity showing either:
  
  
  
  • all changes in equity, or
    
  • changes in equity other than those arising from transactions with equity holders acting in their capacity as equity holders;
    
  
  
• cash flow statement, and
  
• notes, comprising a summary of accounting policies and other explanatory notes.
  

Reports that are presented outside of the financial statements -- including financial reviews by management, environmental reports, and value added statements -- are outside the scope of IFRSs. [IAS 1.9-10]

Fair Presentation and Compliance with IFRSs

The financial statements must "present fairly" the financial position, financial performance and cash flows of an entity. Fair presentation requires the faithful representation of the effects of transactions, other events, and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework. The application of IFRSs, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation. [IAS 1.13]

IAS 1 requires that an entity whose financial statements comply with IFRSs 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. [IAS 1.14]

Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used or by notes or explanatory material. [IAS 1.16]

IAS 1 acknowledges that, in extremely rare circumstances, management may conclude that compliance with an IFRS requirement would be so misleading that it would conflict with the objective of financial statements set out in the Framework. In such a case, the entity is required to depart from the IFRS requirement, with detailed disclosure of the nature, reasons, and impact of the departure. [IAS 1.17-18]

Going Concern

An entity preparing IFRS financial statements is presumed to be a going concern. If management has significant concerns about the entity's ability to continue as a going concern, the uncertainties must be disclosed. If management concludes that the entity is not a going concern, the financial statements should not be prepared on a going concern basis, in which case IAS 1 requires a series of disclosures. [IAS 1.23]

Accrual Basis of Accounting

IAS 1 requires that an entity prepare its financial statements, except for cash flow information, using the accrual basis of accounting. [IAS 1.25]

Consistency of Presentation

The presentation and classification of items in the financial statements shall be retained from one period to the next unless a change is justified either by a change in circumstances or a requirement of a new IFRS. [IAS 1.27]

Materiality and Aggregation

Each material class of similar items must be presented separately in the financial statements. Dissimilar items may be aggregated only if the are individually immaterial. [IAS 1.29]

Offsetting>
Assets and liabilities, and income and expenses, may not be offset unless required or permitted by a Standard or an Interpretation. [IAS 1.32]

Comparative Information

IAS 1 requires that comparative information shall be disclosed in respect of the previous period for all amounts reported in the financial statements, both face of financial statements and notes, unless another Standard requires otherwise. [IAS 1.36]

If comparative amounts are changed or reclassified, various disclosures are required. [IAS 1.38]

Structure and Content of Financial Statements in General

Clearly identify: [IAS 1.46]

• the financial statements
  
• the reporting enterprise
  
• whether the statements are for the enterprise or for a group
  
• the date or period covered
  
• the presentation currency
  
• the level of precision (thousands, millions, etc.)
  

Reporting Period

There is a presumption that financial statements will be prepared at least annually. If the annual reporting period changes and financial statements are prepared for a different period, the enterprise must disclose the reason for the change and a warning about problems of comparability. [IAS 1.49]

Balance Sheet

An entity must normally present a classified balance sheet, separating current and noncurrent assets and liabilities. Only if a presentation based on liquidity provides information that is reliable and more relevant may the current/noncurrent split be omitted. [IAS 1.51] In either case, if an asset (liability) category commingles amounts that will be received (settled) after 12 months with assets (liabilities) that will be received (settled) within 12 months, note disclosure is required that separates the longer-term amounts from the 12-month amounts. [IAS 1.52]

Current assets are cash; cash equivalent; assets held for collection, sale, or consumption within the enterprise's normal operating cycle; or assets held for trading within the next 12 months. All other assets are noncurrent. [IAS 1.57]

Current liabilities are those to be settled within the enterprise's normal operating cycle or due within 12 months, or those held for trading, or those for which the entity does not have an unconditional right to defer payment beyond 12 months. Other liabilities are noncurrent. [IAS 1.60]

Long-term debt expected to be refinanced under an existing loan facility is noncurrent, even if due within 12 months. [IAS 1.64]

If a liability has become payable on demand because an entity has breached an undertaking under a long-term loan agreement on or before the balance sheet date, the liability is current, even if the lender has agreed, after the balance sheet date and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach. [IAS 1.65] However, the liability is classified as non-current if the lender agreed by the balance sheet date to provide a period of grace ending at least 12 months after the balance sheet date, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment. [IA 1.66]

Minimum items on the face of the balance sheet [IAS 1.68]

• (a) property, plant and equipment;
  
• (b) investment property;
  
• (c) intangible assets;
  
• (d) financial assets (excluding amounts shown under (e), (h) and (i));
  
• (e) investments accounted for using the equity method;
  
• (f) biological assets;
  
• (g) inventories;
  
• (h) trade and other receivables;
  
• (i) cash and cash equivalents;
  
• (j) trade and other payables;
  
• (k) provisions;
  
• (l) financial liabilities (excluding amounts shown under (j) and (k));
  
• (m) liabilities and assets for current tax, as defined in IAS 12;
  
• (n) deferred tax liabilities and deferred tax assets, as defined in IAS 12;
  
• (o) minority interest, presented within equity; and
  
• (p) issued capital and reserves attributable to equity holders of the parent.
  

Additional line items may be needed to fairly present the entity's financial position. [IAS 1.69]

IAS 1 does not prescribe the format of the balance sheet. Assets can be presented current then noncurrent, or vice versa, and liabilities and equity can be presented current then noncurrent then equity, or vice versa. A net asset presentation (assets minus liabilities) is allowed. The long-term financing approach used in UK and elsewhere – fixed assets + current assets - short term payables = long-term debt plus equity – is also acceptable.

Regarding issued share capital and reserves, the following disclosures are required: [IAS 1.76]

• numbers of shares authorised, issued and fully paid, and issued but not fully paid
  
• par value
  
• reconciliation of shares outstanding at the beginning and the end of the period
  
• description of rights, preferences, and restrictions
  
• treasury shares, including shares held by subsidiaries and associates
  
• shares reserved for issuance under options and contracts
  
• a description of the nature and purpose of each reserve within owners' equity
  

Income Statement

In the 2003 revision to IAS 1, the IASB is now using "profit or loss" rather than "net profit or loss" as the descriptive term for the bottom line of the income statement.

All items of income and expense recognised in a period must be included in profit or loss unless a Standard or an Interpretation requires otherwise. [IAS 1.78]

Minimum items on the face of the income statement should include: [IAS 1.81]

• (a) revenue;
  
• (b) finance costs;
  
• (c) share of the profit or loss of associates and joint ventures accounted for using the equity method;
  
• (d) a single amount comprising the total of (i) the post-tax profit or loss of discontinued operations and (ii) the post-tax gain or loss recognised on the disposal of the assets or disposal group(s) constituting the discontinued operation; and;
  
• (e) tax expense; and
  
• (f) profit or loss.
  

The following items must also be disclosed on the face of the income statement as allocations of profit or loss for the period: [IAS 1.82]

• (a) profit or loss attributable to minority interest; and
  
• (b) profit or loss attributable to equity holders of the parent.
  

Additional line items may be needed to fairly present the enterprise's results of operations.

No items may be presented on the face of the income statement or in the notes as "extraordinary items". [IAS 1.85]

Certain items must be disclosed either on the face of the income statement or in the notes, if material, including: [IAS 1.87]

• (a) write-downs of inventories to net realisable value or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs;
  
• (b) restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring;
  
• (c) disposals of items of property, plant and equipment;
  
• (d) disposals of investments;
  
• (e) discontinuing operations;
  
• (f) litigation settlements; and
  
• (g) other reversals of provisions.
  

Expenses should be analysed either by nature (raw materials, staffing costs, depreciation, etc.) or by function (cost of sales, selling, administrative, etc.) either on the face of the income statement or in the notes. [IAS 1.88] If an enterprise categorises by function, additional information on the nature of expenses -- at a minimum depreciation, amortisation, and staff costs -- must be disclosed. [IAS 1.93]

Cash Flow Statement

Rather than setting out separate standards for presenting the cash flow statement, IAS 1.102 refers to IAS 7, Cash Flow Statements

Statement of Changes in Equity

IAS 1 requires an entity to present a statement of changes in equity as a separate component of the financial statements. The statement must show: [IAS 1.96]

• (a) profit or loss for the period;
  
• (b) each item of income and expense for the period that is recognised directly in equity, and the total of those items;
  
• (c) total income and expense for the period (calculated as the sum of (a) and (b)), showing separately the total amounts attributable to equity holders of the parent and to minority interest; and
  
• (d) for each component of equity, the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8.
  

The following amounts may also be presented on the face of the statement of changes in equity, or they may be presented in the notes: [IAS 1.97]

• (a) capital transactions with owners;
  
• (b) the balance of accumulated profits at the beginning and at the end of the period, and the movements for the period; and
  
• (c) a reconciliation between the carrying amount of each class of equity capital, share premium and each reserve at the beginning and at the end of the period, disclosing each movement.
  

Notes to the Financial Statements

The notes must: [IAS 1.103]

• present information about the basis of preparation of the financial statements and the specific accounting policies used;
  
• disclose any information required by IFRSs that is not presented on the face of the balance sheet, income statement, statement of changes in equity, or cash flow statement; and
  
• provide additional information that is not presented on the face of the balance sheet, income statement, statement of changes in equity, or cash flow statement that is deemed relevant to an understanding of any of them.
  

Notes should be cross-referenced from the face of the financial statements to the relevant note. [IAS 1.104]

IAS 1.105 suggests that the notes should normally be presented in the following order:

• a statement of compliance with IFRSs;
  
• a summary of significant accounting policies applied, including: [IAS 1.108]
  
  
  
  • the measurement basis (or bases) used in preparing the financial statements; and
    
  • the other accounting policies used that are relevant to an understanding of the financial statements.
    
  
  
• supporting information for items presented on the face of the balance sheet, income statement, statement of changes in equity, and cash flow statement, in the order in which each statement and each line item is presented; and
  
• other disclosures, including:
  
  
  
  • contingent liabilities (see IAS 37) and unrecognised contractual commitments; and
    
  • non-financial disclosures, such as the entity's financial risk management objectives and policies (see IAS 32).
    
  
  

Disclosure of judgements. New in the 2003 revision to IAS 1, an entity must disclose, in the summary of significant accounting policies or other notes, the judgements, apart from those involving estimations, that management has made in the process of applying the entity's accounting policies that have the most significant effect on the amounts recognised in the financial statements. [IAS 1.113]

Examples cited in IAS 1.114 include management's judgements in determining:

• whether financial assets are held-to-maturity investments;
  
• when substantially all the significant risks and rewards of
  ownership of financial assets and lease assets are transferred to
  other entities;
  
• whether, in substance, particular sales of goods are financing
  arrangements and therefore do not give rise to revenue; and
  
• whether the substance of the relationship between the entity and
  a special purpose entity indicates that the special purpose entity
  is controlled by the entity.
  

Disclosure of key sources of estimation uncertainty. Also new in the 2003 revision to IAS 1, an entity must disclose,
in the notes, information about the key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. [IAS 1.116] These disclosures do not involve disclosing budgets or forecasts.

The following other note disclosures are required by IAS 1.126 if not disclosed elsewhere in information published with the financial statements:

• domicile of the enterprise;
  
• country of incorporation;
  
• address of registered office or principal place of business;
  
• description of the enterprise's operations and principal activities;
  
• name of its parent and the ultimate parent if it is part of a group.
  

Disclosures about Dividends

The following must be disclosed either on the face of the income statement or the statement of changes in equity or in the notes: [IAS 1.95]

• the amount of dividends recognised as distributions to equity holders during the period, and
  
• the related amount per share.
  

The following must be disclosed in the notes: {IAS 1.125]

• the amount of dividends proposed or declared before the financial statements were authorised for issue but not recognised as a distribution to equity holders during the period, and the related amount per share; and
  
• the amount of any cumulative preference dividends not recognised.
  

August 2005 Amendments re Capital Disclosures

As part of its project to develop IFRS 7 Financial Instruments: Disclosures, the IASB concluded also to amend IAS 1 to add requirements for disclosures of:

• the entity's objectives, policies and processes for managing capital;
  
• quantitative data about what the entity regards as capital;
  
• whether the entity has complied with any capital requirements; and
  
• if it has not complied, the consequences of such non-compliance.
  

These disclosure requirements apply to all entities, effective for annual periods beginning on or after 1 January 2007, with earlier application encouraged. Illustrative examples are provided as guidance.