IAS 1

Presentation of financial statements

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IAS 1: Presentation of financial statements
• IAS 1 lists the required contents of a company's financial statements.
It also gives guidance on how items should be presented in the
financial statements.

• A complete set of financial statements includes a statement of

financial position, a statement of profit or loss and other
comprehensive income, a statement of changes in equity, a statement
of cash flows and disclosure notes.

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• IAS 1 Presentation of financial statements gives substantial guidance on
the form and content of published financial statements.
• A complete set of financial statements includes the following.
1. Statement of financial position
2. Statement of profit or loss and other comprehensive income (either as a
single statement or as two separate statements)
3. Statement of changes in equity
4. Statement of cash flows
5. Notes, including a summary of significant accounting policies and other
explanatory information

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• IAS 1 gives guidance on the format and content of all of these, apart
from the statement of cash flows, which is covered by IAS 7.

• We will consider each of these in turn in this lecture. First of all,

though, some general points are made about financial statements.

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How items are disclosed
• IAS 1 specifies disclosures of certain items in certain ways.

1. Some items must appear on the face of the statement of financial

position or statement of profit or loss
2. Other items can appear in a note to the financial statements instead

• Recommended formats are given which entities may or may not

follow, depending on their circumstances

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Identification of financial statements
• As a result of the previous point, it is most important that entities
distinguish the financial statements very clearly from any other
information published with them.

• This is because all International Financial Reporting Standards (IFRSs)

apply only to the financial statements (ie the main statements and
related notes), so readers of the annual report must be able to
differentiate between the parts of the report which are prepared
under IFRSs, and other parts which are not.

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• The entity should identify each component of the financial statements
very clearly. IAS 1 also requires disclosure of the following information in
a prominent position. If necessary it should be repeated wherever it is
felt to be of use to the readers in their understanding of the information
presented.
1. Name of the reporting entity (or other means of identification)
2. Whether the accounts cover the single entity only or a group of entities
3. The reporting date or the period covered by the financial statements (as
appropriate)
4. The reporting currency used in presenting the figures in the financial
statements

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• Judgement must be used to determine the best method of presenting
this information. In particular, the standard suggests that the approach
to this will be very different when the financial statements are
communicated electronically.
• The level of precision is important, as presenting figures in thousands
or millions of units makes the figures more understandable.
• The level of precision must be disclosed, however, and it should not
obscure necessary details or make the information less relevant.

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 Reporting period
• Entities normally present financial statements annually. IAS 1 states
that they should be prepared at least as often as this. (annually).

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The statement of financial position
• IAS 1 specifies what should be included in a statement of financial
position and includes a suggested format. It also provides guidance on
the current/non-current distinction.

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 Statement of
financial position
(format)

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Concepts behind
• The statement of financial position makes use of the accounting
equation concept that:
• Assets = Capital + Liabilities
• The statement of financial position is also prepared according to the
business entity convention, that a business is separate from its
owners.

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Assets

• The assets are exactly the same as those we would expect to find in
the accounts of a sole trader.
• The only difference is that the detail is given in notes.
• Only the totals are shown on the face of the statement of financial
position.

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 Equity
• We looked at share capital and reserves in detail in the previous
lectures. Movements in equity must be reported in the statement of
changes in equity, which we will consider below.
• Capital reserves usually have to be set up by law, whereas revenue
reserves are appropriations of profit.
• With a sole trader, profit was added to capital. However, in a limited
company, share capital and profit have to be disclosed separately,
because profit is distributable as a dividend but share capital cannot be
distributed.
• Therefore any retained profits are kept in the retained earnings reserve.
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Liabilities
• Liabilities are split between current and non-current. This is dealt with
next

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The current/non-current distinction
• Current assets and current liabilities of various types have been
discussed in earlier parts of this Text.
• Users of financial statements need to be able to identify current
assets and current liabilities in order to determine the company's
financial position.
• Where current assets are greater than current liabilities, the net
excess is often called 'working capital' or 'net current assets'.

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Alternative views of current assets and
current liabilities
• IAS 1 lays down rules for entities which choose to show the
current/non-current distinction. It also states what should happen if
they do not do so.
• Each entity should decide whether it wishes to present current/non-
current assets and current/non-current liabilities as separate
classifications in the statement of financial position.
• This decision should be based on the nature of the entity's
operations. Where an entity does not choose to make this
classification, it should present assets and liabilities broadly in order
of their liquidity.

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• In either case, the entity should disclose any portion of an asset or
liability which is expected to be recovered or settled after more than 12
months.
• For example, for an amount receivable which is due in instalments over
18 months, the portion due after more than 12 months must be
disclosed.

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Current assets
• An asset should be classified as a current asset when it is:
1. Expected to be realised in, or is held for sale or consumption in, the
entity's normal operating cycle
2. Held primarily for the purpose of being traded
3. Expected to be realised within 12 months after the reporting date
4. Cash or a cash equivalent which is not restricted in its use

• All other assets should be classified as non-current assets.

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Current liabilities
• A liability should be classified as a current liability when it is:

1. Expected to be settled in the entity's normal operating cycle

2. Due to be settled within 12 months of the reporting date
3. Held primarily for the purpose of being traded

• All other liabilities should be classified as non-current liabilities.

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• There are also current liabilities which are not settled as part of the
normal operating cycle, but which are due to be settled within 12
months of the reporting date.
• These include bank overdrafts, income taxes, other non-trade
payables and the current portion of interest-bearing liabilities.
• Any interest-bearing liabilities that are used to finance working capital
on a long-term basis, and that are not due for settlement within 12
months, should be classed as non-current liabilities.

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The statement of profit or loss and other
comprehensive income
• IAS 1 specifies what should be included in a statement of profit or loss
and other comprehensive income and includes a suggested format.
Some items must be disclosed on the face of the statement.

• IAS 1 requires entities to include a statement of profit or loss and

other comprehensive income, either as a single statement or as two
separate statements: a statement of profit or loss and a statement of
other comprehensive income.

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Statement of profit or
loss and other
comprehensive
income (format)

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• As a minimum, IAS 1 requires the following items to be disclosed on the face of
the statement of profit or loss and other comprehensive income.
(a) Revenue
(b) Finance costs
(c) Share of profits and losses of associates and joint ventures accounted for using
the equity method
(d) Pre-tax gain or loss attributable to discontinued operations
(e) Tax expense
(f) Profit or loss
(g) Each component of other comprehensive income classified by nature
(h) Share of the other comprehensive income of associates and joint ventures
(i) Total comprehensive income
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• IAS 1 also requires that any other line items, headings or subtotals be
shown in the statement of profit or loss and other comprehensive
income when it is necessary for an understanding of the entity's financial
position or if another IFRS requires it.
• Management must decide whether to present additional items
separately.
• They should consider factors including materiality and the nature and
function of the items of income and expense when making this decision.

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Revenue
• There are important rules on revenue recognition and these are the
subject of IAS 18 Revenue. (replaced by IFRS 15 issued in 2014).

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Cost of sales
• This represents the summary of the detailed workings we have used
in a sole trader's financial statements.

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Expenses
• Notice that expenses are gathered under a number of headings. Any
detail needed will be given in the notes to the financial statements.

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Finance cost
• This is interest payable during the period. Remember (from the
previous chapter) that this may include accruals for interest payable
on loan stock.

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Income tax expense
• Once again, this will include accruals for the tax due on the current
year's profits.
• However, it may also include adjustments for any over- or
underprovision for prior periods

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Taxation
• Taxation affects both the statement of financial position and the
statement of profit or loss.
• All companies pay some kind of corporate taxation on the profits they
earn, which we will call income tax in line with the terminology in IAS
1, but which you may find called 'corporation tax’.
• The rate of income tax will vary from country to country.
• There may be variations in rate within individual countries for
different types or size of company.

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• Note that because a company has a separate legal personality, its tax is
included in its accounts. An unincorporated business would not show
personal income tax in its accounts, as it would not be a business expense
but the personal affair of the proprietors.
(a) The charge for income tax on profits for the year is shown as a deduction
from profit for the year.
(b) In the statements of financial position, tax payable to the Government is
generally shown as a current liability, as it is usually due within 12 months
of the year end.
(c) For various reasons, the tax on profits in the statement of profit or loss
and the tax payable in the statement of financial position are not normally
the same amount.
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 Example: taxation
A company has a tax liability brought forward of $15,000. The liability is
finally agreed at $17,500 and this is paid during the year.
• The company estimates that the tax liability based on the current
year's profits will be $20,000. Prepare the tax liability account for the
year.

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Solution

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 Gains on property
revaluation
• Gains on property revaluation arise when a property is
revalued.
• The revaluation is recognised in the other comprehensive
income part of the statement of profit or loss and other
comprehensive income and shown in the statement of
changes in equity as a movement in the revaluation
surplus.
• For example, an asset originally cost $10,000 and was
revalued to $15,000.
• The gain on the revaluation is recognised in the statement
of profit or loss and other comprehensive income (in the
other comprehensive income section) and then shown as
a movement in the revaluation surplus in the statement
of changes in equity

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Statement of changes in equity
• IAS 1 requires an entity to provide a statement of changes in equity.
• The statement of changes in equity shows the movements in the
entity's equity for the period.
• The statement of profit or loss and other comprehensive income is a
straightforward measure of the financial performance of the entity, in
that it shows all items of income and expense recognised in a period.

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• It is then necessary to link this result with the results of transactions
with owners of the business, such as share issues and dividends. The
statement making the link is the statement of changes in equity.
• The statement of changes in equity simply takes the equity section of
the statement of financial position and shows the movements during
the year.
• The bottom line shows the amounts for the current statement of
financial position.

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Statement of changes in equity (format)

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Notes to the financial statements
• Notes to the financial statements provide more detail for the users of
the accounts about the information in the statement of profit or loss
and other comprehensive income, the statement of financial position,
the statement of cash flows and the statement of changes in equity.
• For example, the statement of financial position shows just the total
carrying amount of property, plant and equipment owned by an
entity.
• The notes to the financial statements then break down this total into
the different categories of assets, the cost, any revaluation, the
accumulated depreciation and the depreciation charge for the year.

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For your exam, you need to know the
following disclosure requirements in detail.
(a) Tangible non-current assets
(b) Intangible non-current assets
(c) Provisions
(d) Events after the reporting period
(e) Inventory

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Practice Questions

To be shared

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