International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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IAS 8 define it as ‘Standards and Interpretations issued by the International Accounting
Standards Board (IASB). They comprise:
(a) International
Financial Reporting Standards;
(b) International
Accounting
Standards;
(c) IFRIC Interpretations; and
(d) SIC
Interpretations’.
[IAS 1.7, IAS 8.5].
An important point here is that implementation guidance for standards issued by the
IASB does not form part of those standards, and therefore does not contain
requirements for financial statements. [IAS 8.9]. Accordingly, the often voluminous
implementation guidance accompanying standards is not, strictly speaking, part of
‘IFRS’. We would generally be surprised, though, at entities not following such guidance.
The standard applies equally to all entities including those that present consolidated
financial statements and those that present separate financial statements (discussed in
Chapter 8 at 1.1). IAS 1 does not apply to the structure and content of condensed
interim financial statements prepared in accordance with IAS 34 – Interim Financial
Reporting (discussed in Chapter 37 at 3.2), although its provisions relating to fair
presentation, compliance with IFRS and fundamental accounting principles do apply
to such interims. [IAS 1.4]. These provisions of IAS 1 are discussed at 4.1 below.
The objective of the standard is to prescribe the basis for presentation of general
purpose financial statements, and by doing so to ensure comparability both with the
entity’s financial statements of previous periods and with the financial statements of
other entities. The standard sets out overall requirements for the presentation of
financial statements, guidelines for their structure and minimum requirements for their
content. The recognition, measurement and disclosure of specific transactions and
other events are dealt with in other standards and in interpretations. [IAS 1.1, 3].
IAS 1 is primarily directed at profit oriented entities (including public sector business
entities), and this is reflected in the terminology it uses and its requirements. It
acknowledges that entities with not-for-profit activities in the private sector, public
sector or government may want to apply the standard and that such entities may need
to amend the descriptions used for particular line items in the financial statements and
for the financial statements themselves. [IAS 1.5]. Furthermore, IAS 1 is a general standard
that does not address issues specific to particular industries. It does observe, though,
that entities without equity (such as some mutual funds) or whose share capital is not
equity (such as some co-operative entities) may need to adapt the presentation of
members’ or unit holders’ interests. [IAS 1.6].
1.2
Objective and scope of IAS 8
IAS 8 applies to selecting and applying accounting policies, and accounting for changes
in accounting policies, changes in accounting estimates and corrections of prior period
errors. [IAS 8.3]. Its objective is to prescribe the criteria for selecting and changing
accounting policies, together with the accounting treatment and disclosure of changes
Presentation of financial statements and accounting policies 113
in accounting policies, changes in accounting estimates and corrections of errors. The
standard’s intention is to enhance the relevance and reliability of an entity’s financial
statements and the comparability of those financial statements over time and with the
financial statements of other entities. [IAS 8.1].
Two particular issues which one might expect to be dealt with regarding the above are
discussed in other standards and cross-referred to by IAS 8:
• disclosure requirements for accounting policies, except those for changes in
accounting policies, are dealt with in IAS 1; [IAS 8.2] and
• accounting and disclosure requirements regarding the tax effects of corrections of
prior period errors and of retrospective adjustments made to apply changes in
accounting policies are dealt with in IAS 12 – Income Taxes (discussed in
Chapter 29 at 10.2). [IAS 8.4].
2
THE PURPOSE AND COMPOSITION OF FINANCIAL
STATEMENTS
What financial statements are and what they are for are important basic questions for any
body of accounting literature, and answering them is one of the main purposes of IAS 1.
2.1
The purpose of financial statements
IAS 1 describes financial statements as a structured representation of the financial position
and financial performance of an entity. It states that the objective of 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. A
focus on assisting decision making by the users of financial statements is seeking (at least
in part) a forward looking or predictive quality. This is reflected by some requirements of
accounting standards. For example: the disclosure of discontinued operations (discussed
in Chapter 4 at 3); the use of profit from continuing operations as the ‘control number’ in
calculating diluted earnings per share (discussed in Chapter 33 at 6.3.1); and also, the desire
of some entities to present performance measures excluding what they see as unusual or
infrequent items (discussed at 3.2.6 below).
IAS 1 also acknowledges a second important role of financial statements. That is, that they
also show the results of management’s stewardship of the resources entrusted to it.
To meet this objective for financial statements, IAS 1 requires that they provide
information about an entity’s:
(a) assets;
(b) liabilities;
(c) equity;
(d) income and expenses, including gains and losses;
(e) contributions by owners and distributions to owners in their capacity as owners
(owners being defined as holders of instruments classified as equity); [IAS 1.7] and
(f) cash
flows.
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3
The standard observes that this 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. [IAS 1.9].
2.2
Frequency of reporting and period covered
IAS 1 requires that a complete set of financial statements (including comparative
information, see 2.4 below) be presented ‘at least annually’. Whilst this drafting is not
exactly precise, it does not seem to mean that financial statements must never be more
than a year apart (which is perhaps the most natural meaning of the phrase). This is
because the standard goes on to mention that the end of an entity’s reporting period
may change, and that the annual financial statements are therefore presented for a
period longer or shorter than one year. When this is the case, IAS 1 requires disclosure
of, in addition to the period covered by the financial statements:
(a) the reason for using a longer or shorter period; and
(b) the fact that amounts presented in the financial statements are not entirely
/>
comparable. [IAS 1.36].
Normally financial statements are consistently prepared covering a one year period.
Some entities, particularly in the retail sector, traditionally present financial statements
for a 52-week period. IAS 1 does not preclude this practice. [IAS 1.37].
2.3
The components of a complete set of financial statements
A complete set of financial statements under IAS 1 comprises the following, each of
which should be presented with equal prominence: [IAS 1.10-11]
(a) a statement of financial position as at the end of the period;
(b) a statement of profit or loss and other comprehensive income for the period to be
presented either as:
(i) one single statement of comprehensive income with a section for profit and
loss followed immediately by a section for other comprehensive income; or
(ii) a separate statement of profit or loss and statement of comprehensive income.
In this case, the former must be presented immediately before the latter;
(c) a statement of changes in equity for the period;
(d) a statement of cash flows for the period;
(e) notes, comprising significant accounting policies and other explanatory information;
(f) comparative information in respect of the preceding period; and
(g) a statement of financial position as at the beginning of the preceding period when:
(i) an accounting policy has been applied retrospectively; or
(ii) a retrospective restatement has been made; or
(iii) items have been reclassified.
The titles of the statements need not be those used in the standard (shown above).
The standard explains that notes contain information in addition to that presented in
the statements above, and provide narrative descriptions or disaggregations of items
Presentation of financial statements and accounting policies 115
presented in those statements and information about items that do not qualify for
recognition in those statements. [IAS 1.7].
In addition to information about the reporting period, IAS 1 also requires information
about the preceding period. Comparative information is discussed at 2.4 below.
Financial statements are usually published as part of a larger annual report, with the
accompanying discussions and analyses often being more voluminous than the financial
statements themselves. IAS 1 acknowledges this, but makes clear that such reports and
statements (including financial reviews, environmental reports and value added
statements) presented outside financial statements are outside the scope of IFRS.
[IAS 1.14].
Notwithstanding that this type of information is not within the scope of IFRS, IAS 1
devotes two paragraphs to discussing what this information may comprise, observing that:
• a financial review by management may describe and explain the main features of
the entity’s financial performance and financial position and the principal
uncertainties it faces and that it may include a review of:
• the main factors and influences determining financial performance, including
changes in the environment in which the entity operates, the entity’s response
to those changes and their effect, and the entity’s policy for investment to
maintain and enhance financial performance, including its dividend policy;
• the entity’s sources of funding and its targeted ratio of liabilities to equity
(IAS 1 itself requires certain disclosures about capital. These are discussed
at 5.4 below); and
• the entity’s resources not recognised in the statement of financial position in
accordance with IFRS. [IAS 1.13].
• reports and statements such as environmental reports and value added statements
may be presented, particularly in industries in which environmental factors are
significant and when employees are regarded as an important user group. [IAS 1.14].
At first glance it may seem strange that an accounting standard would concern itself with
a discussion of matters outside its scope in this way. However, discursive reports
accompanying financial statements are not just common (indeed, required by most
markets) but also clearly useful, so perhaps the IASB’s discussion is attempting to
encourage and support their preparation. Furthermore, the interaction between
information in financial statements and information elsewhere in an annual report is
one of the issues in the ongoing debate about disclosure effectiveness (see 6 below).
In December 2010 the IASB published a practice statement on management commentary.
The practice statement is a broad, non-binding framework for the presentation of
narrative reporting to accompany financial statements prepared in accordance with IFRS.
Although management commentaries add helpful and relevant information beyond
what is included in the financial statements, IFRS requires the financial statements to
provide a fair presentation of the financial position, financial performance and cash
flows of an entity on a stand-alone basis.
The Board continues to consider wider aspects of corporate reporting and has added to
its agenda a project to revise and update the practice statement (see 6.1 below).
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3
2.4 Comparative
information
IAS 1 requires, except when IFRSs permit or require otherwise, comparative
information to be disclosed in respect of the previous period for all amounts reported
in the current period’s financial statements. [IAS 1.38]. If any information is voluntarily
presented, there will by definition be no standard or interpretation providing a
dispensation from comparatives. Accordingly, comparative information is necessary for
any voluntarily presented current period disclosure.
The above requirement for two sets of statements and notes represents the minimum
which is required in all circumstances. [IAS 1.38A].
An entity may present comparative information in addition to the minimum
comparative financial statements required by IFRS, as long as that information is
prepared in accordance with IFRSs. This comparative information may consist of one
or more primary statements, but need not comprise a complete set of financial
statements. When this is the case, IAS 1 requires an entity to present related note
information for those additional statements. [IAS 1.38C].
For example, an entity may present a third statement of profit or loss and other
comprehensive income (thereby presenting the current period, the preceding period
and one additional comparative period). In such circumstances, IAS 1 does not require
a third statement of financial position, a third statement of cash flows or a third
statement of changes in equity (that is, an additional comparative financial statement).
The entity is required to present, in the notes to the financial statements, the
comparative information related to that additional statement of profit or loss and other
comprehensive income. [IAS 1.38D].
However, further comparative information is required by IAS
1 in certain
circumstances. Whenever an entity:
(a) applies an accounting policy retrospectively; or
(b) makes a retrospective restatement; or
(c) reclassifies
items
; in
its financial statements;
an additional statement of financial position is required as at the beginning of the
preceding period if the change has a material effect on that additional statement. [IAS 1.40A].
As such restatements are considered, by the IASB, narrow, specific and limited, no notes
are required for this additional statement of financial position. [IAS 1.40C, BC32C].
It is important to note that ‘reclassifies’, as that word is used by IAS 1 in this context (at
(c) above), is not referring to a ‘reclassification adjustment’. ‘Reclassification
adjustments’ is a term defined by IAS 1 which describes the recognition of items in profit
or loss which were previously recognised in other comprehensive income (often
referred to as ‘recycling’). IAS 1 applies this definition when setting out the required
presentation and disclosure of such items (see 3.2.4.B below).
Comparative information is also required for narrative and descriptive information
when it is relevant to an understanding of the current period’s financial statements.
[IAS 1.38]. The standard illustrates the current year relevance of the previous year’s
narratives with a legal dispute, the outcome of which was uncertain at the previous
period and is yet to be resolved (the disclosure of contingent liabilities is discussed in
Presentation of financial statements and accounting policies 117
Chapter 27 at 7.2). It observes that users benefit from information that the uncertainty
existed at the end of the previous period, and about the steps that have been taken
during the period to resolve the uncertainty. [IAS 1.38B].
Another example would be the required disclosure of material items (see 3.2.6 below). IAS 1
requires that the nature and amount of such items be disclosed separately. [IAS 1.97]. Often a
simple caption or line item heading will be sufficient to convey the ‘nature’ of material items.
Sometimes, though, a more extensive description in the notes may be needed to do this. In
that case, the same information is likely to be relevant the following year.
As noted at 1.1 above, one of the objectives of IAS 1 is to ensure the comparability of
financial statements with previous periods. The standard notes that enhancing the inter-
period comparability of information assists users in making economic decisions,