SBR Notes IAS 1 PDF

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IAS 1: Presentation of Financial Statements Objective of IAS 1: The objective of IAS 1 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 requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. Standards for recognising, measuring, and disclosing specific transactions are addressed in other Standards and Interpretations.

Scope: IAS 1 applies to all general purpose financial statements that are prepared and presented in accordance with International Financial Reporting Standards (IFRSs). General purpose financial statements are those intended to serve users who are not in a position to require financial reports tailored to their particular information needs. For example annual report.

Application: All types of entities with profit objective are required to prepare financial statements Individual as well as consolidated financial statements if they are in group.

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: • Assets • Liabilities • Equity • Income and expenses, including gains and losses • Contributions by and distributions to owners (in their capacity as owners) • 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: According to IAS 1 Presentation of Financial Statements, a complete set of financial statements has the following components: • A statement of financial position (balance sheet) at the end of the period

• A statement of profit or loss and other comprehensive income (presented as a single statement, or by presenting the profit or loss section in a separate statement of profit or loss, immediately followed by a statement presenting comprehensive income beginning with profit or loss) • A statement of changes in equity for the period • A statement of cash flows for the period • Accounting policies note and other explanatory notes • A statement of financial position at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or corrects an error retrospectively. Other reports and statements in the annual report (such as a financial review, integrated report (Value added report), an environmental report or a social report) are outside the scope of IAS 1. An entity may use titles for the statements other than those stated above. All financial statements are required to be presented with equal prominence. When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements, it must also present a statement of financial position (balance sheet) as at the beginning of the earliest comparative period. 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.

Structure and content of financial statements in general/Identification of financial statements: IAS 1 requires an entity to clearly identify: • The financial statements, which must be distinguished from other information in a published document. • Each financial statement and the notes to the financial statements. In addition, the following information must be displayed prominently, and repeated as necessary: • The name of the reporting entity and any change in the name • Whether the financial statements are a group of entities or an individual entity • Information about the reporting period or period covered by financial statements • The presentation currency (as defined by IAS 21 The Effects of Changes in Foreign Exchange Rates) • The level of rounding used (e.g. thousands, millions).

Reporting period: Financial statements of the company normally prepared for the twelve month period which normally starts from when company starts trading or after the completion of twelve months or

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 entity must disclose the reason for the change and state that amounts are not entirely comparable.

Statement of financial position (balance sheet) An entity must normally present a classified statement of financial position, separating current and noncurrent assets and liabilities, unless presentation based on liquidity provides information that is reliable. In either case, if an asset (liability) category combines 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. 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 realise the asset, or sell or consume it, in its normal operating cycle. • The asset is held for trading purposes. • The entity expects to realise the asset within 12 months after the reporting period. • It is cash or a cash equivalent. (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. Current liabilities: IAS 1 also states that a 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. 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. • The liability is held primarily for the purpose of trading. • 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 (known as rolling over the liability). All other liabilities should be classified as non-current liabilities. This means (amongst other things) that if an entity has the unconditional right to defer settlement of a liability for at least 12 months after the end of the reporting period, that liability would be non-current. When a long-term debt is expected to be refinanced under an existing loan facility, and the entity has the discretion to do so, the debt is classified as non-current, even if the liability would otherwise be due within 12 months.

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 reporting date, the liability is current, even if the lender has agreed, after the reporting date and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach. However, the liability is classified as non-current if the lender agreed by the reporting date to provide a period of grace ending at least 12 months after the end of the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment.

Line items: The line items to be included on the face of the statement of financial position are: (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) Assets held for sale (k) Trade and other payables (l) Provisions (m) Financial liabilities (excluding amounts shown under (k) and (l)) (n) Current tax liabilities and current tax assets, as defined in IAS 12 (o) Deferred tax liabilities and deferred tax assets, as defined in IAS 12 (p) Liabilities included in disposal groups (q) Non-controlling interests, presented within equity (r) Issued capital and reserves attributable to owners of the parent. Additional line items, headings and subtotals may be needed to fairly present the entity's financial position. When an entity presents subtotals, those subtotals shall be comprised of line items made up of amounts recognised and measured in accordance with IFRS; be presented and labelled in a clear and

understandable manner; be consistent from period to period; and not be displayed with more prominence than the required subtotals and totals. Further sub-classifications of line items presented are made in the statement or in the notes, for example: • Classes of property, plant and equipment • Disaggregation of receivables • Disaggregation of inventories in accordance with IAS 2 Inventories • Disaggregation of provisions into employee benefits and other items • Classes of equity and reserves.

Format of statement: IAS 1 does not prescribe the format of the statement of financial position. Assets can be presented current then non-current, or vice versa, and liabilities and equity can be presented current then non-current 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. Share capital and reserves: Regarding issued share capital and reserves, the following disclosures are required: • Numbers of shares authorised, issued and fully paid, and issued but not fully paid • Par value (or that shares do not have a par value) • A reconciliation of the number 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 equity. Additional disclosures are required in respect of entities without share capital and where an entity has reclassified puttable financial instruments.

Statement of profit or loss and other comprehensive income: Concepts of profit or loss and comprehensive income: Profit or loss is defined as "the total of income less expenses, excluding the components of other comprehensive income". Other comprehensive income is defined as comprising "items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other IFRSs". Total comprehensive

income is defined as "the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners". Comprehensive income for the period = Profit or loss + Other comprehensive income 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 1.88] Some IFRSs require or permit that some components to be excluded from profit or loss and instead to be included in other comprehensive income. Examples of items recognised outside of profit or loss • Changes in revaluation surplus where the revaluation method is used under IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets • Remeasurements of a net defined benefit liability or asset recognised in accordance with IAS 19 Employee Benefits (2011) • Exchange differences from translating functional currencies into presentation currency in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates • Gains and losses on remeasuring available-for-sale financial assets in accordance with IAS 39 Financial Instruments: Recognition and Measurement • The effective portion of gains and losses on hedging instruments in a cash flow hedge and the gains and losses on hedging instruments that hedge investments in equity instruments measured at fair value through other comprehensive income under IAS 39 or IFRS 9 Financial Instruments • Gains and losses on remeasuring an investment in equity instruments where the entity has elected to present them in other comprehensive income in accordance with IFRS 9 • The effects of changes in the credit risk of a financial liability designated as at fair value through profit and loss under IFRS 9. In addition, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires the correction of errors and the effect of changes in accounting policies to be recognised outside profit or loss for the current period. Choice in presentation and basic requirements: An entity has a choice of presenting: • A single statement of profit or loss and other comprehensive income, with profit or loss and other comprehensive income presented in two sections, or • Two statements:  a separate statement of profit or loss  a statement of comprehensive income, immediately following the statement of profit or loss and beginning with profit or loss The statement(s) must present: • Profit or loss

• Total other comprehensive income • Comprehensive income for the period • An allocation of profit or loss and comprehensive income for the period between non-controlling interests and owners of the parent. A criticism that has been raised is that there is no consistent basis for determining whether gains or losses should be identified recognised in P&L or in OCI. Profit or loss section or statement: The following minimum line items must be presented in the profit or loss section (or separate statement of profit or loss, if presented): • Revenue • Gains and losses from the derecognition of financial assets measured at amortised cost • Finance costs • Share of the profit or loss of associates and joint ventures accounted for using the equity method • Certain gains or losses associated with the reclassification of financial assets • Tax expense • A single amount for the total of discontinued items Expenses recognised in profit or loss should be analysed either by nature (raw materials, staffing costs, depreciation, etc.) or by function (cost of sales, selling, administrative, etc). If an entity categorises by function, then additional information on the nature of expenses – at a minimum depreciation, amortisation and employee benefits expense – must be disclosed. Material items: IAS 1 specifies, however, that in order to enable users to obtain a better understanding of financial performance, material items of profit or loss should be disclosed, either as separate line items within profit or loss, or in a note to the financial statements, showing both their nature and the amount. IAS 1 provides a list of the type of transaction that might be disclosed. As well as being material, most of these items are relatively unusual and may not occur every year. Users need to be made aware that these items are included in profit and loss because they may distort the overall result for the period. For example, if an entity has sold several properties at a profit, its profit for the current period may be exceptionally high, but will fall to a more normal level in the following period. Material items are normally disclosed in the notes, but they may be disclosed as a separate line item on the face of the statement of profit or loss if they are sufficiently material or unusual to justify this treatment. Other comprehensive income section: The other comprehensive income section is required to present line items which are classified by their nature, and grouped between those items that will or will not be reclassified to profit and loss in subsequent periods. An entity's share of OCI of equity-accounted associates and joint ventures is presented in aggregate as single line items based on whether or not it will subsequently be reclassified to profit or loss.

When an entity presents subtotals, those subtotals shall be comprised of line items made up of amounts recognised and measured in accordance with IFRS; be presented and labelled in a clear and understandable manner; be consistent from period to period; not be displayed with more prominence than the required subtotals and totals; and reconciled with the subtotals or totals required in IFRS. Other requirements: Additional line items may be needed to fairly present the entity's results of operations. Items cannot be presented as 'extraordinary items' in the financial statements or in the notes. Certain items must be disclosed separately either in the statement of comprehensive income or in the notes, if material, including: • 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 • Restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring • Disposals of items of property, plant and equipment • Disposals of investments • Discontinuing operations • Litigation settlements • Other reversals of provisions Reclassification adjustments: Reclassification adjustments are amounts reclassified to profit or loss in the current period that were recognised in other comprehensive income in the current or previous periods. Amounts are said to be recycled from OCI to profit or loss. For example, an entity might own a foreign subsidiary. Exchange gains and losses on the periodic retranslation of the subsidiary’s financial statements are recognised in OCI and accumulated as a separate reserve in equity. When the subsidiary is sold the net gain or loss previously recognised is reclassified from OCI to P&L. For example, suppose that an entity buys a foreign subsidiary at the start of year 1. At the end of year 1 the financial statements of this subsidiary are retranslated resulting in an exchange loss of $10,000. This is recognised in year 1 as a debit to OCI and this debit in turn is transferred to a separate balance in equity. The entity then sells the subsidiary in year 2. The loss previously recognised in OCI must now be recognised in P&L. The double entry to achieve this is: Dr P&L: $10,000 Cr OCI: $10,000 This credit in OCI in turn is transferred to the separate balance in equity where it nets the debit that was taken there in year 1 back to zero.

Reclassification adjustments are needed for most items of other comprehensive income, when a gain or loss is subsequently recognised in profit or loss. Reclassification adjustments required: • For any exchange differences previously recognised in OCI in respect of a foreign operation that is later sold; and • For deferred gains or losses in designated cash flow hedges. Reclassification adjustments are not allowed for: • Changes in the revaluation surplus on a non-current asset, and • Remeasurements of defined benefit pension schemes. Arguments for and against reclassification Ar gume nt sf or

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Reclassification protects the integrity of profit or loss by allowing the initial exclusion of transactions (recognised in OCI) that would distort the profit or loss for the period Reclassification provides users with relevant information about a transaction which occurred in the period Reclassification improves comparability where IFRS permits similar items to be recognised in either profit or loss or OCI

There is no consistent theoretical basis for determining whether transactions should be recycled or not. Reclassification adds to the complexity of financial reporting. Reclassification may lea...