especially by allowing the assessment of trends in financial information for predictive
purposes. [IAS 1.43]. Requiring the presentation of comparatives allows such a
comparison to be made within one set of financial statements. For a comparison to be
meaningful, the amounts for prior periods need to be reclassified whenever the
presentation or classification of items in the financial statements is amended. When this
is the case, disclosure is required of the nature, amount and reasons for the
reclassification (including as at the beginning of the preceding period). [IAS 1.41].
The standard acknowledges, though, that in some circumstances it is impracticable to
reclassify comparative information for a particular prior period to achieve
comparability with the current period. For these purposes, reclassification is
impracticable when it cannot be done after making every reasonable effort to do so.
[IAS 1.7]. An example given by the standard is that data may not have been collected in
the prior period(s) in a way that allows reclassification, and it may not be practicable to
recreate the information. [IAS 1.43]. When it proves impracticable to reclassify
comparative data, IAS 1 requires disclosure of the reason for this and also the nature of
the adjustments that would have been made if the amounts had been reclassified.
[IAS 1.42].
As well as reclassification to reflect current period classifications as required by IAS 1, a
change to comparatives as they were originally reported could be necessary:
(a) following a change in accounting policy (discussed at 4.4 below);
(b) to correct an error discovered in previous financial statements (discussed at 4.6
below); or
(c) in relation to discontinued operations (discussed in Chapter 4 at 3.2).
2.5
Identification of the financial statements and accompanying
information
2.5.1
Identification of financial statements
It is commonly the case that financial statements will form only part of a larger annual
report, regulatory filing or other document. As IFRS only applies to financial statements,
it is important that the financial statements are clearly identified so that users of the
report can distinguish information that is prepared using IFRS from other information
that may be useful but is not the subject of those requirements. [IAS 1.49-50].
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This requirement will be particularly important in those instances in which standards
allow for disclosure of information required by IFRS outside the financial statements.
As well as requiring that the financial statements be clearly distinguished, IAS 1 also
requires that each financial statement and the notes be identified clearly. Furthermore,
the following is required to be displayed prominently, and repeated when that is
necessary for the information presented to be understandable:
(a) the name of the reporting entity or other means of identification, and any change
in that information from the end of the preceding period;
(b) whether the financial statements are of an individual entity or a group of entities;
(c) the date of the end of the reporting period or the period covered by the set of
financial statements or the notes (presumably whichever is appropriate to that
component of the financial statements);
(d) the presentation currency, as defined in IAS 21 – The Effects of Changes in Foreign
Exchange Rates (discussed in Chapter 15 at 3); and
(e) the level of rounding used in presenting amounts in the financial statements.
[IAS 1.51].
These requirements are met by the use of appropriate headings for pages, statements,
notes, and columns etc. The standard notes that judgement is required in determining
the best way of presenting such information. For example, when the financial
statements are presented electronically, separate pages are not always used; the above
items then need to be presented to ensure that the information included in the
financial statements can be understood. [IAS 1.52]. IAS 1 considers that financial
statements are often made more understandable by presenting information in
thousands or millions of units of the presentation currency. It considers this
acceptable as long as the level of rounding in presentation is disclosed and material
information is not omitted. [IAS 1.53].
2.5.2
Statement of compliance with IFRS
As well as identifying which particular part of any larger document constitutes the
financial statements, IAS 1 also requires that financial statements complying with IFRS
make an explicit and unreserved statement of such compliance in the notes. [IAS 1.16]. As
this statement itself is required for full compliance, its absence would render the whole
financial statements non-compliant, even if there was otherwise full compliance. The
standard goes on to say that ‘an entity shall not describe financial statements as
complying with IFRSs unless they comply with all the requirements of IFRSs.’ [IAS 1.16].
The note containing this statement of compliance is also usually where entities provide
any other compliance statement required by local regulation. For example, entities
required to comply with IFRS as adopted for use in the EU would typically state
compliance with that requirement alongside the statement of compliance with IFRS itself
(assuming, of course, that the financial statements were in full compliance with both).
Presentation of financial statements and accounting policies 119
3
THE STRUCTURE OF FINANCIAL STATEMENTS
As noted at 2.3 above, 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; and
(f) a statement of financial position as at the beginning of the preceding period in
certain circumstances (see 2.4 above). [IAS 1.10-10A].
The standard adopts a generally permissive stance, by setting out minimum levels of
required items to be shown in each statement (sometimes specifically on the face of the
statement, and sometimes either on the face or in the notes) whilst allowing great
flexibility of order and layout. The standard notes that sometimes it uses the term
‘disclosure’ in a broad sense, encompassing items ‘presented in the financial statements’.
It observes that other IFRSs also require disclosures and that, unless specified to the
contrary, they may be made ‘in the financial statements’. [IAS 1.48]. This begs the
question: if not in
‘the financial statements’ then where else could they be made? We
suspect this stems from, or is reflective of, an ambiguous use of similar words and
phrases. In particular, ‘financial statements’ appears to be restricted to the ‘primary’
statements (statement of financial position, statement of profit or loss and other
comprehensive income, statement of changes in equity and statement of cash flows)
when describing what a ‘complete set of financial statements’ comprises (see 2.3 above).
This is because a complete set also includes notes. For the purposes of specifying where
a particular required disclosure should be made, we consider the term ‘in the financial
statements’ is intended to mean anywhere within the ‘complete set of financial
statements’ – in other words the primary statements or notes.
IAS 1 observes that cash flow information provides users of financial statements with a
basis to assess the ability of the entity to generate cash and cash equivalents and the
needs of the entity to utilise those cash flows. Requirements for the presentation of the
statement of cash flows and related disclosures are set out IAS 7. [IAS 1.111]. Statements
of cash flows are discussed in Chapter 36; each of the other primary statements listed
above is discussed in the following sections.
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3.1
The statement of financial position
3.1.1
The distinction between current/non-current assets and liabilities
In most situations (but see the exception discussed below, and the treatment of non-
current assets held for sale discussed in Chapter 4 at 2.2.4) IAS 1 requires statements of
financial position to distinguish current assets and liabilities from non-current ones.
[IAS 1.60]. The standard uses the term ‘non-current’ to include tangible, intangible and
financial assets of a long-term nature. It does not prohibit the use of alternative
descriptions as long as the meaning is clear. [IAS 1.67].
The standard explains the requirement to present current and non-current items
separately by observing that when an entity supplies goods or services within a clearly
identifiable operating cycle, separate classification of current and non-current assets
and liabilities on the face of the statement of financial position will provide useful
information by distinguishing the net assets that are continuously circulating as working
capital from those used in long-term operations. Furthermore, the analysis will also
highlight assets that are expected to be realised within the current operating cycle, and
liabilities that are due for settlement within the same period. [IAS 1.62]. The distinction
between current and non-current items therefore depends on the length of the entity’s
operating cycle. The standard states that the operating cycle of an entity is the time
between the acquisition of assets for processing and their realisation in cash or cash
equivalents. However, when the entity’s normal operating cycle is not clearly
identifiable, it is assumed to be twelve months. [IAS 1.68, 70]. The standard does not
provide any guidance on how to determine if an entity’s operating cycle is ‘clearly
identifiable’. In some businesses the time involved in producing goods or providing
services varies significantly from one customer project to another. In such cases, it may
be difficult to determine what the normal operating cycle is. In the end, management
must consider all facts and circumstances and judgment to determine whether it is
appropriate to consider that the operating cycle is clearly identifiable, or whether the
twelve months default is to be used.
Once assets have been classified as non-current they should not normally be reclassified
as current assets until they meet the criteria to be classified as held for sale in
accordance with IFRS 5 (see Chapter 4 at 2.1). However, an entity which routinely sells
items of property plant and equipment previously held for rental should transfer such
items to inventory when they cease to be rented and become held for sale. [IAS 16.68A].
Assets of a class that an entity would normally regard as non-current that are acquired
exclusively with a view to resale also should not be classified as current unless they meet
the criteria in IFRS 5. [IFRS 5.3].
The basic requirement of the standard is that current and non-current assets, and
current and non-current liabilities, should be presented as separate classifications on
the face of the statement of financial position. [IAS 1.60]. The standard defines current
assets and current liabilities (discussed at 3.1.3 and 3.1.4 below), with the non-current
category being the residual. [IAS 1.66, 69]. Example 3.2 at 3.1.7 below provides an
illustration of a statement of financial position presenting this classification.
An exception to this requirement is when a presentation based on liquidity provides
information that is reliable and is more relevant. When that exception applies, all assets
Presentation of financial statements and accounting policies 121
and liabilities are required to be presented broadly in order of liquidity. [IAS 1.60]. The
reason for this exception given by the standard is that some entities (such as financial
institutions) do not supply goods or services within a clearly identifiable operating cycle,
and for these entities a presentation of assets and liabilities in increasing or decreasing
order of liquidity provides information that is reliable and more relevant than a
current/non-current presentation. [IAS 1.63].
The standard also makes clear that an entity is permitted to present some of its assets
and liabilities using a current/non-current classification and others in order of liquidity
when this provides information that is reliable and more relevant. It goes on to
observe that the need for a mixed basis of presentation might arise when an entity has
diverse operations. [IAS 1.64].
Whichever method of presentation is adopted, IAS 1 requires for each asset and liability
line item that combines amounts expected to be recovered or settled:
(a) no more than twelve months after the reporting period; and
(b) more than twelve months after the reporting period;
disclosure of the amount expected to be recovered or settled after more than twelve
months. [IAS 1.61].
The standard explains this requirement by noting that information about expected dates
of realisation of assets and liabilities is useful in assessing the liquidity and solvency of
an entity. In this vein, IAS 1 contains a reminder that IFRS 7 – Financial Instruments:
Disclosures – requires disclosure of the maturity dates of financial assets (including
trade and other receivables) and financial liabilities (including trade and other payables).
This assertion in IAS 1 is not strictly correct, as IFRS 7 in fact only requires a maturity
analysis (rather than maturity dates) and only requires this for financial liabilities (see
Chapter 50 at 5.4.2). Similarly, IAS 1 views information on the expected date of
recovery and settlement of non-monetary assets and liabilities such as inventories and
provisions as also useful, whether assets and liabilities are classified as current or as non-
current. An example of this given by the standard i
s that an entity should disclose the
amount of inventories that are expected to be recovered more than twelve months after
the reporting period. [IAS 1.65].
3.1.2
Non-current assets and disposal groups held for sale or distribution
The general requirement to classify items as current or non-current (or present them
broadly in order of liquidity) is overlaid with further requirements by IFRS 5 regarding
non-current assets and disposal groups held for sale or distribution (discussed in
Chapter 4 at 3). The aim of IFRS 5 is that entities should present and disclose
information that enables users of the financial statements to evaluate the financial
effects of disposals of non-current assets (or disposal groups). [IFRS 5.30]. In pursuit of this
aim, IFRS 5 requires:
• non-current assets and the assets of a disposal group classified as held for sale or
distribution to be presented separately from other assets in the statement of
financial position; and
• the liabilities of a disposal group classified as held for sale or distribution to be
presented separately from other liabilities in the statement of financial position.
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These assets and liabilities should not be offset and presented as a single amount. In addition:
(a) major classes of assets and liabilities classified as held for sale or distribution should
generally be separately disclosed either on the face of the statement of financial
position or in the notes (see 3.1.6 below). However, this is not necessary for a
disposal group if it is a subsidiary that met the criteria to be classified as held for
sale or distribution on acquisition; and
(b) any cumulative income or expense recognised in other comprehensive income
relating to a non-current asset (or disposal group) classified as held for sale or
distribution should be presented separately. [IFRS 5.38-39].
3.1.3 Current
assets
IAS 1 requires an asset to be classified as current when it satisfies any of the following
criteria, with all other assets classified as non-current. The criteria are:
(a) it is expected to be realised in, or is intended for sale or consumption in, the entity’s
normal operating cycle (discussed at 3.1.1 above);
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