General requirements for financial statements presentation are included in IAS 1 Presentation of Financial Statements. In general, this standard relates only to annual financial statements. However, paragraphs IAS 1.15-35 apply also to interim reporting (IAS 1.4). They cover fair presentation and compliance with IFRS, going concern, accrual basis of accounting, offsetting, materiality and aggregation. Interim reporting is covered in IAS 34.
IAS 1 applies to general purpose financial statements (IAS 1.1) which are defined as financial statements ‘intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs’. Financial statements that are filed with a court registry are not general purpose financial statements (IAS 1.BC11-13).
IAS 1 notes that its terminology in suitable for profit-oriented entities. Entities with not-for-profit activities may use different names for particular items included in financial statements (IAS 1.5). The same relates to entities that do not have equity as defined in IAS 32 Financial Instruments: Presentation (IAS 1.6).
Reports presented together with financial statements (e.g. management commentary or environmental reports) are outside the scope of IFRS (IAS 1.13-14).
A complete set of financial statements
Paragraph IAS 1.10 lists what comprises a complete set of financial statements, noting that a company may choose different titles for these statements. All the statements should be presented with equal prominence (IAS 1.11).
Compliance with IFRS
Financial statements should include an explicit and unreserved statement of compliance with IFRS in the notes. However, this can only be the case if an entity complies with all requirements of all IFRS (IAS 1.16). In practice, entities are often required by local law to comply with IFRS as adopted by local legislation. For example, in the European Union (EU) public entities are required to comply with IFRS ‘as adopted by the EU’.
IAS 1 takes into account a possibility that – ‘in the extremely rare circumstances’ – an entity will depart from a particular IFRS requirement. This is possible if an entity believes that such a departure is necessary to avoid presenting information so misleading that it would conflict with the objective of general purpose financial reporting set in Chapter 1 of the Conceptual Framework. Paragraphs IAS 1. 20-22 set out disclosure requirements if this happens. Such a departure happens extremely rarely, if ever.
Alternatively, an entity may follow the IFRS requirement in question, but make a disclosure in the notes showing how would financial statements look like, if a departure was made (IAS 1.23).
Identification of financial statements
Paragraphs IAS 1.49-53 cover identification of financial statements. These requirements are rather straightforward and they are causing few problems in practice.
Going concern is one of the fundamental principles of reporting under IFRS (and other major GAAP). It means that the financial statements are prepared under the assumption that the entity will continue its operations in the foreseeable future (at least 12 months). IAS 1 requires the management to assess whether an entity is a going concern, that is: whether the management does not intend to liquidate the entity or to cease trading, or have any realistic alternative but to do so. If there are any material uncertainties in this respect – those should be disclosed. Paragraphs IAS 1.25-26 dive into more details.
Interestingly, IFRS do not say what accounting principles to apply if an entity is not a going concern. IAS 1.25 requires only to disclose what accounting policies were used when preparing financial statements. One of the solutions is to measure all assets and liabilities using their liquidation value.
See also the educational material at IFRS.org.
Materiality and aggregation
Paragraphs IAS 1.29-31 are extremely important when it comes to deciding if financial statements are user friendly or not. IFRS require tons of disclosures and entities need to be aware that they don’t need to put all of them into financial statements if they are not material. The same applies to presentation in a separate line in primary financial statements. Entities should keep materiality in mind all the time when preparing financial statements as reminders are rarely put in other IFRS or in other publications.
More discussion on materiality is included on a separate page.
As a rule, entities should not offset assets and liabilities or income and expenses unless required or permitted by a specific IFRS. Paragraphs IAS 1.32-35 give examples of what can be offset and when offsetting is not allowed. See also a section on offsetting of financial instruments in IAS 32.
Frequency of reporting
General requirements for frequency of reporting
IAS 1 requires entities to present a complete set of financial statements at least annually (IAS 1.36), but national regulation is usually more stringent in this respect. So-called Public Interest Entities (‘PIE’) are usually required to present financial statements on a bi-annual or quarterly basis (but these are often interim financial statements in the scope of IAS 34). Half-year financial statements are sometimes required by local law to be a complete set of financial statements.
IAS 1 allows reporting on a 52-week basis instead of a calendar-year basis (IAS 1.37).
Changes of the reporting period
When changing the reporting period, entities need to disclose the fact clearly and provide reasons for such a decision (IAS 1.36). It is also a good idea to include an explanatory note showing comparative data that is comparable, i.e. with same number of months as current reporting period. A change in reporting period affects two full reporting periods, because when entities are a year after the change, the comparative data is for a longer/shorter period than a year, as this was the period of change.
General requirements for comparative information
As a rule, entities should present comparative information for the preceding period for all amounts reported in the current period, even without specific requirement in a given IFRS. However, it is not required to include narrative/descriptive information relating to preceding period if it is not relevant to understanding current period (IAS 1.38).
If entities present more periods in comparative information, they can do so only in selected primary financial statements (e.g. two years of comparative information for P&L only). Nevertheless, entities need to include these additional periods also in the notes (IAS 1.38C-38D).
Change in accounting policy, retrospective restatement or reclassification
Paragraphs IAS 1.40A-46 cover presentation of the statement of financial position when changes in accounting policy, retrospective restatement or reclassification occur. This is the ‘third balance sheet’ at the beginning of the preceding period (which is not the same as the earliest comparative period if you decide to present more comparative periods). A few points to note here:
- the third balance sheet is required only if there is a material impact on the opening balance of the preceding period (IAS 1.40A(b)),
- if the third balance sheet is presented, entities are not required to include the third comparative columns in the notes (IAS 1.40C). But it is worth considering adding this column to the notes where numbers were affected by the change,
- the third balance sheet is not required in interim financial statements (IAS 1.BC33).
Loads of disclosures relating to changes in accounting policies and corrections or errors are also required by IAS 8.
Statement of financial position
General requirements for the statement of financial position
IAS 1.54 lists line items that should be presented, as a minimum, in the statement of financial position. Entities should remember that separate lines are not required if they are immaterial (IAS 1.31). Entities can add additional line items on the top of this list, e.g. for entity or industry specific items.
IAS 1 allows adding subtotals provided that the criteria in IAS 1.55A are met. If they are added, it can be argued that these subtotals are in accordance with IFRS. See also discussion on APMs on the page on IFRS 8. As a rule, assets and liabilities are presented as current and non-current in the statement of financial position (IAS 1.60). As an exception, presentation based on liquidity is allowed if it is more relevant to understanding of the financial position of an entity (applicable mostly to financial institutions). Also a mixed approach is allowed (IAS 1.64).
Current and non-current assets and liabilities
See separate page on classification of assets and liabilities as current and non-current.
Other information relating to the statement of financial position
Paragraphs IAS 1.77-80A add some additional disclosure requirements. Noteworthy are requirements relating to equity (IAS 1.79), which start with number of shares, but then become far reaching. IAS 1 requires do disclose ‘rights, preferences and restrictions relating to share capital, including restrictions on the distribution of dividends and the repayment of capital’. This kind of restrictions apply in most legal jurisdictions (e.g. not all retained earnings can be distributed as dividends), but lots of companies remain silent about such restrictions in their financial statements.
Statement of profit or loss and other comprehensive income
General requirements for statement of profit or loss and other comprehensive income
IAS 1 allows two approaches in presenting profit or loss (‘P&L’) and other comprehensive income (‘OCI’). Entities can either present one statement that will include both P&L and OCI, or they can have separate statements for P&L and OCI (IAS 1.81A-B). See the section on OCI below for more discussion on this subject.
The profit or loss and total comprehensive income for the period should be allocated to owners of the parent and non-controlling interest (IAS 1.81B).
Minimum contents in P&L and OCI
General requirements for minimum contents in P&L and OCI
Paragraphs IAS 1.82-82A list items that should be presented, as a minimum, on the face of the P&L and OCI. These are required only if material to the financial statements (IAS 1.31).
Gains and losses arising from the derecognition of financial assets measured at amortised cost
Gains and losses arising from the derecognition of financial assets measured at amortised cost should be calculated as set out in paragraph IFRS 188.8.131.52. Therefore, the carrying amount must be remeasured as at the date of the derecognition.
Entities can add subtotals to P&L provided that the criteria in IAS 1.85A are met. If so, it can be argued that these subtotals are in accordance with IFRS and are not alternative/management performance measures. Operating income is arguably the most popular subtotal in P&L. This is in part due to the fact that the 1997 version of IAS 1 required presenting this subtotal (it is no longer the case). Paragraph IAS 1.BC56 notes that operating profit (or similar subtotal) should not exclude items that would normally be regarded as operating, such as inventory write-downs, restructuring costs or depreciation/amortisation expense.
See also discussion on alternative/management performance measures on a page on IFRS 8.
Profit or loss (P&L)
General requirements for profit or loss (P&L)
All items of income and expense should be recognised in P&L unless other IFRS permits or requires otherwise (IAS 1.88). This can be linked to the requirements relating to statement of changes in equity stating that the change in equity during a period results from income and expense recognised by the entity and from transactions with owners in their capacity as owners. In other words, there should be no recognition of income/expense outside of P&L or OCI unless specifically required by other IFRS.
IAS 1.97 requires, with examples given in IAS 1.98, separate disclosure of material items of income and expense. It can be done either directly in P&L or in the notes.
Presentation of expenses in P&L
There are two ways of presenting expenses in P&L (IAS 1.99-105):
- based on their nature (e.g. depreciation, employee benefits), or
- based on their function within entity (e.g. cost of sales, distribution costs, administrative expenses).
When presenting expenses by function, entities are required to give additional information on the nature of expenses in the notes (IAS 1.104).
Other comprehensive income (OCI)
General requirements for other comprehensive income (OCI)
Other comprehensive income (‘OCI’) includes income and expense that other IFRS specifically exclude from P&L. There is no conceptual basis for when an item should be included in OCI and when in P&L. Vast majority of companies presents P&L and OCI as separate statements as OCI is still mostly ignored by investors and other users outside accounting and financial reporting. Companies are afraid that presenting P&L and OCI in one statement would make a net profit a subtotal in arriving at the total comprehensive income.
All items in OCI must be grouped into two categories: those that will be and will not be reclassified subsequently to P&L (IAS 1.82A). Examples of items that will be reclassified to P&L are foreign exchange differences on translation of foreign operations or gains/losses on certain cash flow hedges. Examples of items that will not be reclassified to P&L are remeasurement gains/losses on defined benefit employee plans or revaluation gains on properties.
When an item is reclassified from OCI to P&L it impacts both statements and such a reclassification is referred to as a reclassification adjustment. A reclassification adjustment is defined as the amount reclassified to P&L in the current period that was recognised in OCI in the current or previous periods (IAS 1.7). Entities must disclose the amount of such reclassifications, either by presenting them gross in OCI or in the notes. See paragraphs IAS 1.92-96 for more discussion.
Recycling of items of OCI to P&L is another area with no conceptual basis and the criteria are somewhat arbitrary.
Items of OCI can be presented either net of tax effects or before tax effects with tax effect shown separately in aggregate. Either way, entities are required to disclose the amount of income tax relating to each item of OCI, including reclassification adjustments (IAS 1.90-91). It’s hard to say why so many tax details are required for OCI, there is no requirement to disclose income tax effect for every item in P&L.
Statement of changes in equity
Paragraph IAS 1.106 lists line items that should be presented, as a minimum, in the statement of changes in equity. Paragraphs that follow set the disclosure requirements that can be met either on the face or in the notes. An important thing to note is that the changes in equity during a period can result either from income and expense or from transactions with owners in their capacity as owners (IAS 1.109). In other words, entities cannot reflect changes in assets or liabilities directly through equity if it is not an effect of a transaction with owners in their capacity as owners (e.g. capital contributions or dividends), unless specifically required by other IFRS.
Statement of cash flows
Statement of cash flows is covered in IAS 7.
Structure of explanatory notes
Requirements relating to the structure of explanatory notes are set out in paragraphs IAS 1.112-116. In practice, there are a few popular approaches to ordering explanatory notes:
- Primary financial statements (P&L, OCI etc.)
- Statement of compliance and basis of preparation
- Accounting policies
- Explanatory notes
It is safe to say that Approach #1 follows certain logic, as you need to be aware about accounting policies before you start crunching the numbers. But in practice hardly anyone reads accounting policies from A to Z, so users often need to skip several pages after the primary financial statements to get to explanatory notes.
- Primary financial statements (P&L, OCI etc)
- Statement of compliance and basis of preparation
- Explanatory notes
- Accounting policies
Approach #2 treats accounting policies as an appendix and they are put at the end of the financial statements. The main advantage of this approach is that it puts all the numbers together without ‘interruptions’ coming from lengthy descriptions of accounting policies.
- Primary financial statements (P&L, OCI etc)
- Statement of compliance and basis of preparation
- Explanatory notes with relevant accounting policies in each note (i.e. mix of tables with numbers and descriptions of relevant accounting policies)
Approach #3 presents accounting policies together with relevant explanatory notes, e.g. accounting policies relating to inventory are a part of the explanatory note showing a disaggregation of inventory.
Disclosure of accounting policies
Requirements relating to accounting policies are set out in paragraphs IAS 1.117-121. Entities should include only significant accounting policies and skip accounting policies relating to immaterial items, not to mention accounting policies relating to transactions/balances that do not occur at all. Some IFRS give more specific requirements for accounting policies relating to a particular area.
It is important to include entity specific policies without copy-pasting IFRS.
Disclosing judgements and sources of estimation uncertainty
Paragraphs IAS 1.122-133 cover a very important area which is often approached with too little attention. First thing to note is that judgements and estimates are not the same. Judgements are more like opinions and decisions about substance and facts and circumstances relating to a transaction and event, whereas estimates relate broadly to the valuation of an item which often require making predictions/assumptions about the future or unknown present.
Entities are required (IAS 1.122) to disclose judgements made in financial statements. Some IFRS specifically require disclosure of judgements relating to a particular area, but IAS 1 should be applied to all areas even when there are no specific requirements in other IFRS.
IAS 1.125 requires disclosure of information about the assumptions and other major sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Entities should also disclose the carrying amount of those assets/liabilities. Similarly to disclosure of judgements, some IFRS get very specific in terms of what should be disclosed about estimates that were made.
IAS 1.129 provides examples what should be disclosed. This includes sensitivity analysis and explanations of changes made to past assumptions for unresolved uncertainties.
It is tempting to get general with this disclosure and present the information in a way that gives little or no real information. Remember that the disclosure is about ‘a significant risk of resulting in a material adjustment within the next financial year’. See more discussion contained in paragraphs IAS 1.126-133.
Management of capital
IAS 1.134-136 set out disclosures relating to management of capital. These requirements are applicable to all entities irrespective of whether they are subject to external capital requirements.
Important thing to note here is that entities are not required to disclose exact values/ratios of capital objectives or requirements.
Other miscellaneous disclosure requirements are contained in paragraphs IAS 1.136A-138.
IASB has a project called ‘Primary Financial Statements’ in its pipeline which aims to replace IAS 1 with a new IFRS and prescribe more specific requirements regarding presentation of financial statements, with particular focus on profit or loss statement. Read more on the project page and see an overview of the published exposure draft.