IAS 1: Presentation of Financial Statements 1. Purpose of IAS 1 IAS 1 provides the guidelines for the presentation of financial statements. The objective is to ensure that financial statements are comparable across periods and entities, and that users can make informed decisions based on reliable and consistent financial information. 2. Key Definitions Financial Statements: Structured records of the financial performance and position of an entity. Includes: 1. Statement of Financial Position (Balance Sheet) 2. Statement of Profit or Loss and Other Comprehensive Income 3. Statement of Changes in Equity 4. Statement of Cash Flows 5. Notes to the Financial Statements Accrual Basis of Accounting: Revenues and expenses are recognized when they occur, not when cash is received or paid. 3. Components of Financial Statements IAS 1 outlines the following components that must be included in the financial statements: Statement of Financial Position (Balance Sheet) - provides information about the financial position of an entity at a specific point in time Key Components of the Statement of Financial Position According to IAS 1, the Statement of Financial Position consists of the following main components: 1. Assets - Resources controlled by the entity that are expected to provide future economic benefits. Assets are classified into two categories: - - Current Assets: Assets that are expected to be realized, sold, or consumed within the normal operating cycle of the business or within 12 months from the reporting date, whichever is longer. Non-Current Assets: Assets that are not expected to be realized or consumed within the entity’s normal operating cycle or 12 months. These typically include long-term investments, property, plant, equipment, and intangible assets. 2. Liabilities - Present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow of resources. Liabilities are also classified into: - Current Liabilities: Obligations that are expected to be settled within the normal operating cycle or within 12 months. Non-Current Liabilities: Obligations that are not expected to be settled within the normal operating cycle or within 12 months. These often include long-term debt and pension obligations. 3. Equity - The residual interest in the assets of the entity after deducting liabilities. Essentially, it represents the owners’ stake in the company. Equity includes: 1. Share capital: The amount invested by shareholders in the business. 2. Retained earnings: The accumulated net income of the entity, less any dividends distributed. 3. Other comprehensive income: Gains and losses that are not recognized in profit or loss but are included in equity, such as revaluation surpluses or foreign currency translation adjustments. Statement of Profit or Loss and Other Comprehensive Income - provides a comprehensive view of a company's financial performance by including not only the net profit or loss for a reporting period but also other comprehensive income (OCI) items. Key Components of the Statement of Total Comprehensive Income The Statement of Total Comprehensive Income comprises two primary sections: 1. Profit or Loss - The profit or loss section reflects the performance of the entity's normal business operations. It is typically prepared as per the Statement of Profit or Loss (Income Statement). This section includes: Revenue (sales of goods or services) Expenses (cost of goods sold, administrative expenses, etc.) Other gains and losses (e.g., gains or losses from the sale of assets) 2. Other Comprehensive Income (OCI) - Other Comprehensive Income (OCI) represents items of income or expense that are excluded from the Profit or Loss but still affect equity. - The items included in OCI typically arise from changes in fair value, foreign currency translation, and certain revaluation adjustments. Common items included in OCI are: Revaluation surplus: Gains from the revaluation of property, plant, and equipment or intangible assets. Foreign currency translation differences: Gains or losses from translating the financial statements of foreign operations. Actuarial gains and losses: Changes in the value of defined benefit pension plans. Fair value gains/losses on financial instruments: Changes in the fair value of certain financial assets and liabilities, such as available-for-sale financial assets. Classification of Other Comprehensive Income (OCI) IAS 1 does not require the segregation of items within Other Comprehensive Income, but it does recommend that items be classified based on whether they are recycled (reclassified) to profit or loss in the future or not recycled: A. Items that may be reclassified to profit or loss: Foreign currency translation differences: Gains or losses from converting the financial statements of foreign operations. Gains or losses on cash flow hedges: Changes in the fair value of financial instruments designated as hedges. Gains or losses on available-for-sale financial assets: Unrealized gains or losses on investments that are not held to maturity. B. Items that will not be reclassified to profit or loss: Revaluation surpluses: Adjustments from revaluation of property, plant, and equipment. Actuarial gains or losses: Changes in pension plan obligations. Changes in the fair value of financial assets classified as "at fair value through other comprehensive income" (FVOCI). Disclosure Requirements According to IAS 1 IAS 1 requires additional disclosures regarding Other Comprehensive Income: Tax Effects on OCI: The tax impact of each component of OCI should be disclosed separately. Cumulative Amounts: If an item in OCI is recycled into profit or loss in future periods, the cumulative amount of such items should be disclosed. Reclassification Adjustments: When items that were previously reported in OCI are reclassified to profit or loss, the amount reclassified should be disclosed. Statement of Changes in Equity - provides detailed information about the movements in equity during a specific period Key Components of the Statement of Changes in Equity According to IAS 1, the Statement of Changes in Equity typically includes the following key components: - - - Opening Balance: The amount of equity at the beginning of the reporting period (as shown in the previous period’s statement). Total Comprehensive Income: This includes both: Profit or loss: The entity’s profit or loss for the period. Other comprehensive income (OCI): Items recognized outside profit or loss (such as revaluation surpluses, foreign currency translation adjustments). Transactions with Owners: This includes: Capital contributions: Issuances of shares or other equity instruments. Dividends: Distributions to shareholders. Repurchases of shares: When the entity buys back its own shares. Changes in Accounting Policies or Errors: Adjustments for the correction of prior-period errors or changes in accounting policies, if applicable. Closing Balance: The amount of equity at the end of the period, reflecting all the changes during the period. Statement of Cash Flows 1. Outlines the cash inflows and outflows of the entity during the period. Notes to the Financial Statements 1. Provide additional context, explanations, and breakdowns of figures in the financial statements. 4. General Presentation Requirements Fair Presentation & Compliance with IFRS: Financial statements should present a true and fair view of the financial position, performance, and cash flows. Going Concern Assumption: Entities prepare financial statements on the assumption they will continue to operate for the foreseeable future unless there is evidence to the contrary. Materiality & Aggregation: Information is material if its omission or misstatement could influence the economic decisions of users. Similar items may be aggregated, and dissimilar items must be separated. Offsetting: Assets and liabilities, and income and expenses, should not be offset unless required by IFRS. 5. Presentation of Specific Items Income Taxes: Disclose the income tax expense or income, divided between current and deferred tax. Extraordinary Items: IAS 1 no longer permits the classification of items as "extraordinary"; they should be treated as usual. 6. Classification of Assets and Liabilities Current Assets: Expected to be sold, used, or consumed within 12 months after the reporting period. Non-Current Assets: Not expected to be converted into cash or consumed within the next 12 months. Current Liabilities: Expected to be settled within 12 months. Non-Current Liabilities: Not expected to be settled within 12 months. IAS 7: Statement of Cash Flows 1. Purpose of IAS 7 IAS 7 outlines the requirements for the presentation of cash flows. The objective is to provide information about the historical cash flows of an entity that is useful for assessing its liquidity, solvency, and financial flexibility. 2. Key Definitions Cash: Includes cash on hand and demand deposits. Cash Equivalents: Short-term, highly liquid investments that are easily convertible to a known amount of cash with an insignificant risk of change in value. 3. Structure of the Cash Flow Statement The cash flow statement reports cash inflows and outflows in three sections: Operating Activities Investing Activities Financing Activities 4. Operating Activities This section reports the cash flows related to the entity's core operating activities. These include: Cash received from customers Cash paid to suppliers and employees Cash generated from or used in the core business The cash flow from operating activities can be reported using two methods: Direct Method: Cash receipts and payments are directly reported (preferred by IAS 7, though less commonly used). Indirect Method: Starts with profit or loss and adjusts for changes in working capital, non-cash transactions, and other items. 5. Investing Activities Investing activities refer to cash flows from the acquisition and disposal of long-term assets and investments, such as: Purchase or sale of property, plant, and equipment Purchase or sale of investments in securities or subsidiaries Loans made to other parties or repayments from them 6. Financing Activities Financing activities include cash flows that affect the equity and borrowing of the entity. This includes: Cash received from issuing shares or borrowing funds Cash paid to repay debt or buy back shares Dividends paid to shareholders 7. Non-Cash Transactions Non-cash transactions (such as purchasing assets on credit) do not appear in the cash flow statement but may be disclosed elsewhere in the financial statements. 8. Presentation of the Cash Flow Statement Operating Cash Flows: Must be shown separately from investing and financing activities. Cash and Cash Equivalents: Should be disclosed at the end of the cash flow statement and reflect the cash available at the beginning and end of the period. 9. Special Issues Foreign Exchange Effects: Cash flows arising from foreign currency transactions should be reported in the cash flow statement. Interest and Dividends: Can be classified as operating, investing, or financing activities depending on the nature of the underlying transaction (though generally, interest and dividends are operating or financing activities). Taxes: Income tax paid is typically classified as an operating activity unless it relates to investing or financing activities. Comparison of IAS 1 and IAS 7 Aspect IAS 1 (Presentation of Financial Statements) IAS 7 (Statement of Cash Flows) Objective Sets guidelines for presentation of financial statements. Provides information about the entity’s cash flows. Scope Applies to the entire set of financial statements. Only focuses on the cash flow statement. Statement of Financial Position, Statement of Main Profit or Loss, Statement of Cash Flows, Components Statement of Changes in Equity, Notes to the Financial Statements. Key Focus Cash inflows and outflows related to operating, investing, and financing activities. Liquidity, solvency, and Financial position, performance, and changes in financial flexibility through equity. cash flows.
