IAS 1 – Presentation of Financial Statements
Agenda
• Objective of the Standard
• Components of Financial Statements
• Fair Presentation under IFRS
• Concepts of IAS 1
• Minimium Disclosure in a set of Financial Statements
• Capital Disclosures
Slide 1
Overview of the Standard
• Objective of IAS 1
– Prescribes a basis for presenting general purpose financial
statements that is is comparable and consistent
– period over period
– With the financial statements of other entities
– Sets out underlying assumptions that govern the preparation of
financial statements and
– Stipulates minimum guidelines for financial statement structure
and disclosure requirements.
Slide 2
Overview of the Standard
• Purpose of financial statements
– Transparent information about entity’s:
– Assets and liabilities
– Equity
– Income and expenses
– Cash flows
Slide 3
Components of Financial Statements
• A complete set of financial statements include at a minimum
the following components:
– Balance sheet/Statement of Financial Position
– Statement of Income
– Statement of Comprehensive Income
– Statement of changes in equity
– Cash flow statement
– Accounting policies and explanatory notes
– Where there are reclassifications and adjustments to prior
periods, the entity is required to disclose a Statement of
Financial Position as at the beginning of the earliest comparative
period.
Slide 4
Components of Financial Statements
• Question – An entity would like to issue a balance sheet and
a statement of income only, it did not believe presentation of
cashflows, shareholders’ equity and explanatory notes are
necessary – is this correct?
• Solution – A complete set of financial statement as required
by IAS1 requires minimum disclosure that includes schedule
on shareholders’ equity, cash flows as well as notes.
• However, an entity may exclude presentation of a statement
of cashflow if and only if it can prove that the information of
cashflows is already appropriately disclosed in the other
components of the financial statements. Disclosure of this is
required in the notes to the financial statements.
Slide 5
Fair Presentation under IFRS
• Overriding premise in the preparation of financial information
----fair presentation of an entity’s cashflow and results of
operations based on a consistent set of
principles/guidelines.
• Presumed that IFRS will result in fair presentation
– With additional disclosure where necessary
– Inappropriate accounting policies are not rectified by disclosure
(An entity cannot adopt inappropriate accounting policies and
just disclose that it is inappropriate in their note disclosures and
assume this would mitigate the wrong accounting.)
Slide 6
Fair Presentation of Financial Results
• Fair as guided by:
– The selection and application of consistent accounting policies in
accordance with authoritative guidance under IFRS/IASB
– Presentation of information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information.
– Providing additional disclosures when compliance with the
specific requirements in IFRSs is insufficient to enable users to
understand the impact of particular transactions, other events
and conditions on the entity’s financial position and financial
performance.
• Departure from a specific guideline --- allowable if and only if
application of IFRS would materially mispresent the
substance of the transaction.
Slide 7
Departure from IFRS – required disclosure
• Explanation that the departure results in fair presentation
• Compliance with IFRS, except for…
– The standard or interpretation not complied with
– Nature of the departure
– What treatment would have been under IFRS
– Why compliance would be misleading & conflict with IFRS obj.
– The treatment adopted
• Financial impact of the departure
– Current year departure
– Current year impact of prior year departure
Slide 8
Basis Pillars of Financial Statement
Presentation
• Accrual Basis of Accounting
• Going Concern Assumption
• Materiality and Aggregation
• Offsetting
• Comparative Disclosure
• Estimation Uncertainty
• Management Judgement
• Reclassifications of prior period comparatives
Slide 9
Accrual Basis of Accounting
• Financial information, other than cash flow statement is
required to be presented on an accrual basis.
• Revenue, expenses, assets and liabilities are recorded in
the period where criteria for recognition and measurement is
satisfied.
Slide 10
Accrual Basis of Accounting - Example
• Company A has a sales contract to sell 50 units of product A
to Company B. At the end of August when it prepares it
financial statements under IFRS, it only delivered 40 units to
Company B. It had received the payment from Company B
for all 50 units in advance.
• Question – how much revenue can Company A recognize in
its August financial statements?
• Response – Company A can only recognize and measure
revenue for 40 units that are sold and delivered to Company
B. Although Company A has received the entire payment for
50 units, it had only delivered to Company B 40 units. It has
not effectively earned the revenue for all 50 units.
Slide 11
Going Concern
• Key assumption in the preparation of financial statement.
• An assessment is required to be made by management
– Intention to liquidate or
– No realistic alternative but to liquidate
• Disclosure of uncertainties is required.
• Disclosure of any other method used to prepare financial
statements
Slide 12
Going Concern – Example 1
• Company A experienced significant decrease in its sales this
year. It has significant bank loans that are coming due and is
concerned whether it can survive and also pay its loans.
Company A’s owners are concerned about the economic
situation but do not intent to close the business.
• Question – does the going concern assumption apply to
Company A’s financial statements?
• Response – Yes, while Company A is not having a good
business year, it has no intention to close and therefore the
assumption that it will be continue to operate is valid. The
financial statement of the Company will continue to be
presented under that assumption. Depending on the
seriousness of the business downturn, Company A may
disclose this in its financial statements.
Slide 13
Going Concern – Example 1 (cont’d)
• If there is risk that GC is not appropriate, the Company (and
the auditors) should assess:
– Whether there are impariment indicators?
– Whether assets should be written down to recoverable amount?
– Whether provision is required for any unavoidable costs under onerous
contracts ?
– Whether debt now becomes due/current classification ?
Slide 14
Going Concern – Management Assessment
• Question – What types of information do management need
to prepare as part of its assessment of going concern?
• Response – the Company should review financial
ratios/measures that indicate its ability to continue to operate
in the next 12 months, at a minimum. This should generally
include but is not limited to:
– Review of the following12 months’ cash flow projection
– Review of the Company’s sales/suppliers structure and payment
requirements
– Review of the Company’s debt positions and whether the Company will
be liquid enough to meet its obligations
THESE ASSESSMENTS SHOULD BE INITIATED BY MANAGEMENT.
Slide 15
Offsetting
• Balance sheet
– Offsetting is never allowed, unless explicitly permitted by another
Standard
• Statement of Income
– Offsetting is not allowed, unless:
– Permitted by another Standard
– Similar transactions, immaterial gains or losses
Slide 16
Offsetting - Example
• Example – Company A and B are unrelated parties,
Company A has trading relationship with its suppliers, it then
sells to Company B. Company B pays A for the supplies at
the same cost to A. Can A net off the revenue from B and
the cost it incurred with its suppliers?
• Response - No, the practice of selling and buying at the
same cost does not represent a contractual arrangement for
reimbursement of costs of goods.
Slide 17
Offsetting – Example
• Example – Company A rents the property from the landlord who
could not complete the property ready for renting out. Company A
itself enters into a loan arrangement with a bank to finance
construction of leasehold improvements (to get the property
ready). The bank agreement does not make reference to the
landlord. Company A has another agreement with its landlord
where Company A can net of the amount of rental expenses with
the lease payments. (effectively the landlord will pay for the
finance costs to construct the leasehold improvements.)
Can Company A net off its loan payments due to the bank with
the amount it will recover from the landlord?
• Response – NO, the Company has to present its obligations
under the loan arrangement separate from the amount
recoverable from the landlord.
Slide 18
Consistency, Materiality and Aggregation
• Consistency of presentation
– Unless change is required by IAS, or significant change in
operations require accounting change – presentation of F/S
should be consistent period over period
• Materiality and aggregation
– Separate presentation of material items
– Aggregation of immaterial amounts
– Applies to both Balance Sheet and Statement of Income
Slide 19
Other Concepts of IAS 1
Comparative Disclosures
• F/S in compliance with IFRS are generally required to
provide comparative balances and disclosures.
• Unless it is explicitly permitted by IFRS, comparatives are
required.
Measurement Uncertainty/Management Estimate and
Judgement
• Assumption that there is inherent need for management
estimation and judgement for certain items or transactions.
• Disclosure of the types of estimates and critical judgement
areas is a MUST in IAS 1
Slide 20
Disclosure in a Balance Sheet
• Provide information that assists users in assessing liquidity/
solvency
• Classification of assets & liabilities as current/ non-current
– Based on conditions existing at balance sheet date
– KEY: 12 months
• Alternatively in order of liquidity
– Only if this provides reliable & more relevant information
Slide 21
Disclosure in Balance Sheet
• Current assets
– Expected to realized in normal course of operating cycle,
– Held primarily for trading purposes,
– Expected to be realized within 12 months,
– Unrestricted cash or cash equivalents
• Current liabilities
– Expected to settle in normal course of operating cycle
– Held primarily for trading purposes,
– Due to be settled within 12 months,
– Entity does not have unconditional right to defer
Slide 22
Disclosure in Balance Sheet
• Non-current assets and liabilities
– All those not classified as current
• Financial liabilities (FL) are current, if settlement within 12
months, even if:
– original term > 12 months
– intention to refinance on a long term basis
– agreement to refinance after B/S date but before FS are issued
• FL are current if breach of covenant and can be called
– Because they become due on demand
– Remains as non-current if waiver is received BY B/S date
• Non-adjusting post-B/S events
– Refinancing, rectifying breach after B/S date
Slide 23
Disclosure in Balance Sheet - Example
•Question – Company A’s year-end is December. In
December 2012, it has total receivables from Company B in
the amount of 500,000TL. Of this amount, one receivable of
200,000TL is due by the end of Feburary 2013. The rest
relating to a long term sales arrangement is due in March
2014. Assuming all sales have been delivered.
How should Company A present the receivables in its
financial statements?
•Response: Only 200,000TL would be a current receivables in
the December year-end financial statement with the rest as
long term receivable.
Slide 24
Disclosure in Balance Sheet - Example
•Question – The Company could not meet its loan covenants
as at 31 December 2011. It also was not able to renegotiate
the terms of the loan. The loan agreement states that in the
event of covenant default, the loan is due immediately on
demand. What should the Company consider when it is
preparing the 2011 financial statements?
•Response – Since the loan now becomes due on demand
and it was not renegotiated or refinanced, the Company
should reclassify the portion of the loan that was considered
Long Term and reclassify it to ‘Current’.
Slide 25
Minimum account line items in B/S
• Cash and Cash equivalents
• Trade and other receivables and payables
• Biological assets
• Inventories
• Property, plant and equipment
• Investment properties
• Intangible assets
• Financial assets & liabilities
• Equity accounted investments
• Trade and other payables
• Provisions
• Liabilities & assets for current tax
• Deferred tax assets & liabilities
• Minority interests, as part of equity
• Issued capital & reserves
Slide 26
Statement of Income
• Revenue
• Expenses (either by function or by nature)
• Finance costs (separate from finance revenue – NO offsetting is allowed)
• Share of the profit or loss of associates and joint ventures accounted for
using the equity method;
• Tax expense;
• a single amount comprising the total of:
– (i)the post-tax profit or loss of discontinued operations and
– (ii)the post-tax gain or loss recognised on the measurement to fair value less
costs to sell or on the disposal of the assets or disposal group(s) constituting
the discontinued operation;
• Profit or loss;
• Each component of other comprehensive income classified by nature
• Share of the other comprehensive income of associates and joint
ventures accounted for using the equity method; and
• Total comprehensive income
Slide 27
Statement of Comprehensive Income
• Requires non-owners type transactions to be presented as
part of Other Comprehensive Income.
• Examples include: changes in FX differences due to foreign
operations, revaluation reserve, hedging differences, etc.
• Companies have the option of presenting a single combined
statement of income and comprehensive income =
Statement of Total Comprehensive Income, or,
• Presenting two separate statements – Statement of Income
and a separate Statement of Comprehensive Income.
• Disclosure of profit/loss and related EPS appropriated to
owners and minority interests is required in both disclosure
options
Slide 28
Statement of Comprehensive Income – Single Format:
Revenue
2012
2011
xxxx
xxxx
– Cost of sales
Gross margin
– Operating expenses (classification of expenses by profit function)
Profit/(Loss) before tax
– Income tax expense (recovery)
PROFIT/LOSS for the year
Other Comprehensive Income:
(list items individually at net of tax amounts or at pre-tax balances with a
separate line called ‘Income tax relating to components of other
comprehensive income’ )
Other comprehensive income for the year, net of tax
TOTAL COMPREHENSIVE INCOME
Slide 29
Statement of Comprehensive Income – Single Statement Format:
2012
2011
Owners of the parent
xxx
xxx
Minority Interest
yyy
yyy
ZZZ
ZZZ
Owners of the parent
xxx
xxx
Minority interest
yyy
yyy
ZZZ
ZZZ
Profit attributable to:
(related breakdown on EPS)
Total Comprehensive Income attributed to:
Slide 30
Statement of Comprehensive Income – two statements format:
2012
2011
Revenue
– Cost of sales
Gross margin
– Operating expenses (classification of expenses by profit function)
Profit/(Loss) before tax
– Income tax expense (recovery)
PROFIT/LOSS for the year
Profit attributable to:
Owners of the parent
xxx
xxx
Minority Interest
yyy
yyy
(related breakdown on EPS)
Slide 31
Statement of Comprehensive Income – two statements format
(cont’d)
PROFIT/LOSS for the year
2012
2011
xxx
xxx
Other Comprehensive Income:
(list items individually at net of tax amounts or at pre-tax balances with a
separate line called ‘Income tax relating to components of other
comprehensive income’ )
Other comprehensive income for the year, net of tax
TOTAL COMPREHENSIVE INCOME
ZZZ
ZZZ
Owners of the parent
xxx
xxx
Minority interest
yyy
yyy
ZZZ
ZZZ
Total Comprehensive Income attributed to:
Slide 32
Statement of Changes in Owners’ Equity
• Total Comprehensive Income
• Capital transactions
• Accumulated profit / loss at beginning and end of period
• Reconciliation of share capital, premium and reserves
Slide 33
Owner Changes in Equity and Statement of Comprehensive
Income
• All owner changes in equity to be reflected in a Statement of
Changes in Equity and all non-owner changes in a
Statement of Comprehensive Income (one statement or two
statement format);
• Examples of owner changes in equity:
– Proceeds on issue of shares
– Dividend payments to owners
• Examples of non-owner changes in equity:
– Revaluation surplus
– Translation differences related to foreign operations
– Gains or losses on AFS financial assets/cash flow hedges
– Share of other comprehensive income of assocaites
– Actuarial gains or losses on pension plans
Slide 34
Other disclosures
When the item is material, the following should be disclosed:
• write-downs of inventories to net realisable value or of property, plant and
equipment to recoverable amount, as well as reversals of such write-downs;
• restructurings of the activities of an entity and reversals of any provisions for the
costs of restructuring;
• disposals of items of property, plant and equipment;
• disposals of investments;
• discontinued operations;
• litigation settlements; and
• other reversals of provisions.
Slide 35
Note Disclosure
– Statement of Compliance with IFRS
– Basis of Accounting
– Summary of Significant Accounting Policies
– Supporting information for items presented in the face of the
financial statements
– Contingencies, commitment, guarantee.
Slide 36
Capital Disclosures
• An entity is required to disclose the following:
– Its objectives, policies and processes for managing capital
– Quantitative data about what the entity regards as capital
– Whether the entity has complied with any capital requirements
– If it has not complied, the consequences of such noncompliance
Slide 37
Capital Disclosures - example
The Group manages its capital to ensure that entities in the Group will be able to
continue as a going concern while maximizing the return to stakeholders through
the optimization of the debt and equity balance. The capital structure of the
Group consists of debt, which includes the borrowings, cash and cash
equivalents and equity attributable to equity holders of the parent, comprising
issued capital and retained earnings.
The Group’s board of directors reviews the capital structure regularly. As a part of
this review, the board considers the cost of capital and the risks associated with
each class of capital. Based on recommendations of the board, the Group will
balance its overall capital structure through the payment of dividends, new share
issues as well as the issue of new debt or the redemption of existing debt.
Th e Company is required to meet certain financial covenants related to its loans,
as disclosed in Note XXX Borrowings. For the year ended 31 December 2008,
the Company has met its capital requirements per the loan covenants.
Slide 38
Overview of the structure of the IFRS Foundation and IASB
Slide 39
Kamu Gözetimi Muhasebe ve Denetim Standartları Kurumu
QUESTIONS?
Slide 40