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IAS 1 –Presentation of Financial Statements

“That you were born in a bakery doesn’t make you a loaf of bread.”
Anonymous

M ost people find the layout of each standard boring. Hence, let’s take our time to first
understand the concept of the title and body of each standard. This will help simplify the
mystery behind it.
Carefully read through these to have a clearer view of what each standard entails as explained
below.
Subject matter: this refers to the title or topic of the standard issued, or preferably the subject
of discussion e.g. IAS 1 addresses the Presentation of Financial Statements. While IAS 2 addresses
Inventories.
Objective: this refers to the purpose of issuing the standard. Why did the IASB go through the
stress of producing this standard? What guideline is the standard prepared to provide? –these
are the questions the objective provides answer for.
Scope: this refers to the area of coverage of the standard. What the standard covers and/or what
it fails to cover or address.
Definition: this gives an expression to the accounting meaning of the jargons used in the standard
e.g. the definition of an asset to an accountant is quite different from what it means to a lay-man.
Recognition Criteria: this refers to the basis upon which an element of financial statement
(asset/liability/equity/expense/income) is carried (written/recognized/included) on the face of
the financial statements (Statement of profit or loss account/statement of financial position).
Measurement: this refers to the basis upon which cost is attached to a particular element of the
financial statement. Note that accounting does more of quantitative activities. This is in tandem
with the monetary concept. Hence, what is our basis of attaching value to this element?
Disclosure: this refers to the aspect of disclosing in the notes to the account, both the supporting
explanations and qualitative factors that affect the financial statement with respect to the
element of financial statement discussed. Since we can’t possibly record qualitative factors that
affect the decisions of the stakeholders, then a platform for this has been created –this is referred
to as the disclosures made in the notes. It entails both the quantitative and qualitative
explanations to the elements recognized on the face of the financial statements.

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Note that the standards are not limited to the details above. Each standard might have some
additional features discussed. The above are merely general issues addressed by the IASB with
respect to each standard issued.

Okay! So let’s set the ball rolling.

IAS 1 –Presentation of Financial Statements

OBJECTIVE
IAS 1 provides guidelines on the presentation of the “general purpose financial statements” so
as to ensure COMPARABILITY both with the entity’s financial statements of previous periods
and with those of other entities.
It provides overall requirements for the presentation of financial statements, guidance on their
structure and the minimum requirements for their contents.
It also prescribes the components of the financial statements in a bid to generate a complete set
of financial statements.

Wait! Don’t get it twisted

You might wonder why the adjective to the financial statement read ‘general purpose’. This is
because there are so many users of financial statements –existing investors, potential investors,
creditors, lenders, suppliers, customers, government agencies, financial analysts, employees,
management, among others. As a result, it is not just tedious, but also impossible for an
organization to prepare and present financial statements that will be specifically tuned to the
need of each user. Hence, the IASB magnanimously expects organizations (to the best of their
ability), to present financial statements that will serve a general purpose and not in favor of any
group of users.
Note that it has been reiterated that the IASB was borne out of the need to enable comparability
of financial statements both within an organization (comparing the performance of two or more
years) and with the financial statements of competitors.

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SCOPE
The requirements of IAS 1 are to be applied to all ‘general purpose financial statements’ that
have been prepared and presented in accordance with IFRS.
It is not applicable to condensed interim financial statements prepared according to IAS 34

Wait! Don’t get it twisted

You might wonder what a condensed interim financial statement is. IAS 34 –Interim Financial
Reporting addresses financial statements prepared during a normal accounting period, that is,
before the end of the year. Interim reports can be complete or condensed. It is complete when
it is prepared for a year (IAS 1 addresses this) while it is condensed when it is prepared for a
period shorter than a full year. IAS 1 therefore shifts its gaze away from condensed financial
statements and leaves IAS 34 to deal with the details.

DEFINITION
Impracticable: Applying a requirement becomes impracticable when the entity cannot apply a
requirement despite all reasonable efforts to do so.
IFRS: Include Standards and interpretations adopted by the IASB and those issued by them.
These include:

 International Financial Reporting Standards e.g. IFRS 1, IFRS 2, IFRS 3, among others
 International Accounting Standards e.g. IAS 1, IAS 2, IAS 8, among others
 Interpretations issued by the IFRS Interpretation Committee, named IFRIC
 Interpretations issued by the defunct Standing Interpretation Committee, named SIC

Materiality: An item is deemed to be material if its omission or misstatement would influence

the economic decisions of a user taken on the basis of the financial statements. Materiality is
determined based on the item’s nature, size, and/or the surrounding circumstances.
Notes to financial statements: A collection of information providing descriptions and
disaggregated information relating to items included in the financial statements. It also includes
the information that do not appear in the financial statements but are disclosed due to
requirements of IFRS.

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Other comprehensive income – comprises items of income and expenses (including

reclassification adjustments) that are not recognized in the Statement of Profit or Loss, as
required or permitted by other IFRS.

Wait! Don’t get it twisted

The IFRS –International Financial Reporting Standards is the general name the IASB decided to
call all standards.
Since the IASB started issuing standards in the year 2003, each standard issued by the IASB bore
the name IFRS e.g. IFRS 1, IFRS 2 etc.
Also, the IFRIC –International Financial Reporting Standards Interpretation Committee, the
Committee in charge of issuing interpretations to the IFRS issued by the IASB, attached the name
IFRIC to each of its interpretations e.g. IFRIC 1, IFRIC 2 etc.
Note that the IASB adopted (took full use of) the standards (IAS e.g. IAS 1, IAS 2 etc.) previously
issued by its predecessor (IASC) and the interpretations (SIC e.g. SIC 1, SIC 2 etc.) issued by the
Standing Interpretations Committee (SIC). Hence, the IASB chose to refer to all the standards as
IFRS.
Hey! Let’s take a break

Just for laughs…

Personnel manager to Job seeker: If you cut an apple into four pieces, they are called quarters.
Slice it into eight pieces and they are called eights. What
would it be called if you cut the apple into 8,000 pieces?
Job seeker: Applesauce
______________________________________________________________________________
Boss: Why do you always come to work so late?
Secretary: It’s your fault, boss. You’ve trained me so well not to watch
the clock at the office that I do forget to watch it at home.
______________________________________________________________________________
My doctor is a generous man. He told me I had only four months to live. When I told him that
my accountant thinks I’d be unable to pay his bills before I died, he gave me another six months.
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Hey! Welcome back

In the previous edition, we discussed the elements of financial statements. Let’s discuss the
components of the financial statements. In short, what are those stuffs referred to as financial
statements?

COMPONENTS OF A COMPLETE SET OF FINANCIAL STATEMENTS

 Statement of financial position;
 Statement of profit or loss and other comprehensive income;
 Statement of changes in equity;
 Statement of cash flows; and
 Explanatory notes.

An additional Statement of financial position as at the beginning of the earliest comparative

period will be prepared when an accounting policy has been applied retrospectively or items in
the financial statements have been restated or reclassified.

GENERAL FEATURES OF A FINANCIAL STATEMENT

Going concern
•Financial statements should be prepared on a going concern basis unless management intends
to liquidate the entity or cease trading or has no realistic option but to do so.
•When upon assessment it becomes evident that there are material uncertainties regarding the
ability of the business to continue as a going concern, those uncertainties should be disclosed in
the notes.
•In the event that the financial statements are not prepared on a going concern basis, that fact
should be disclosed, together with the basis on which they are prepared, along with the reason
for such a decision.

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Accrual: Accrual basis of accounting should be applied when preparing the financial
statements, except for cash flow information. Under this basis, items are recognized as assets,
liabilities, equity, income, and expenses when they meet the definitions and recognition
criteria.

Aggregation: Aggregation of immaterial items of a similar nature and function is allowed.

Material items should not be aggregated e.g. aggregating Trade receivables (Debtors) with
Inventories, cos they are both current assets, is wrong. Also, Items with a dissimilar nature or
function should be presented separately, unless they are immaterial.

Offset: Assets and liabilities should not be offset unless it is required or allowed by another
IFRS. However, immaterial gains, losses, and related expenses arising from similar transactions
and events can be offset e.g. Discount allowed (an expense) cannot be subtracted from
Discount received (an income).

Consistency of Presentation: Entities are required to retain their presentation and classification
of items in successive periods unless an alternative would be more appropriate or if so required
by a Standard.

Comparative Information: Comparative information (including narrative disclosures) relating to

the previous period should be reported alongside current period disclosure, unless otherwise
required.
Fair Presentation: this requires the faithful representation of the effects of transactions, other
events and conditions in accordance with the definitions and recognition criteria for assets,
liabilities, income and expenses set out in the IASB Framework.
The application of IFRSs, with additional disclosure when necessary, is presumed to result in
financial statements that achieve a fair presentation.’

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PRESENTATION OF FINANCIAL STATEMENTS

Statement of Financial Position (Balance Sheet)

The Statement of Financial Position provides information about the financial state of the
entity. It distinguishes between major categories and classifications of assets and liabilities.

Current or non-current distinction. The Statement of Financial Position distinguishes between

current and noncurrent assets, and between current and non-current liabilities. Assets and
liabilities to be recovered or settled respectively within 12 months should be disclosed as
current. While those assets and liabilities to be recovered or settled respectively over 12
months should be disclosed as non-current.

Wait! Don’t get it twisted

Assets and liabilities are presented based on how difficult cash is expected to be generated
from them and how difficult cash is to be paid to them, respectively. This method is referred
to as recording assets and liabilities in their increasing order of liquidity.

This is a major reason why land and building will be recorded first, while cash will be treated
as the last figure. Also Equity is recorded first, while the least liability e.g accrued expense is
recorded as the last figure, depending on the organization’s transactions. Hence, all assets
and liabilities should be presented in the order in which they can or might be required to be
liquidated.

Exception: In the case of a bank or similar financial institution, Cash is the most illiquid item.
Hence, it stays on top of the financial statement.

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Below is a typical format of a Statement of Financial Position:

Statement of financial position of Soteria Business School as at 31 December 20XX

₦m ₦m
Assets
Non-current assets
Property, plant and equipment X
Goodwill X
Intangible assets X
Investments X
Total Non-current assets X

Current assets
Inventories X
Trade and other receivables X
Other current assets X
Cash and cash equivalents X
Non-current assets held for sale X
Total current assets X
Total assets X

Equity and liabilities

Equity
Share capital X
Share Premium X
Revaluation surplus X
Retained earnings (accumulated profits) X
Other components of equity X
Non-controlling interest X
Total equity X

Non-current liabilities
Long-term borrowings X
Deferred tax X
Long-term provisions X
Total non-current liabilities X

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Current liabilities
Trade and other payables X
Short-term borrowings (bank overdraft) X
Current portion of long-term borrowing X
Current tax payable X
Short-term provisions X
Total current liabilities X
Total liabilities X
Total equity and liabilities X

Statement of Profit or Loss and Other Comprehensive Income

This Includes all Items of income and expense i.e. all ‘non-owner’ changes in equity including

 Components of profit or loss and

 Other comprehensive income i.e. items of income and expense that are not recognized
in profit or loss as required or permitted by other IFRS.

These items may be presented either:

 In a single statement of profit or loss and other comprehensive income (in which there
is a sub-total for profit or loss); or
 In a separate statement of profit or loss (displaying components of profit or loss) and a
statement of profit or loss and other comprehensive income (beginning with profit or
loss and displaying components of other comprehensive income).

An entity shall recognize all items of income and expense in a period in profit or loss unless an
IFRS requires or permits otherwise.

An entity shall present an analysis of expenses recognized in profit or loss using a classification
based on either their nature or their function within the entity, whichever provides information
that is reliable and more relevant.
However, an entity classifying expenses by the “function of expense” method shall disclose
additional information on the nature of expenses, including depreciation and amortization
expenses and employee benefit.

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Nature of Expense Method

Revenue XX
Other income XX
XX
Changes in inventories XX
Raw materials used XX
Employee benefits expenses XX
Depreciation/amortization expense XX
Other expenses XX
Total expenses (XX)
Profit XX

Function of Expense Method

Revenue XX
Cost of sales (XX)
Gross Profit XX
Other Income XX
Distribution Cost (XX)
Administrative cost (XX)
Other Expenses (XX)
Finance cost (XX)
Profit before tax XX
Taxation (XX)
Profit for the year XX

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Other comprehensive income

Gains on property revaluation XX
Total comprehensive income for the year XX

The statement of changes in equity

This includes the following information:
The total income for the period;
The effects on each component of equity of retrospective application or retrospective
restatement in accordance with IAS 8; and
A reconciliation between the opening and closing balances each component of equity,
separately disclosing each change.
It shows dividends recognized as distributions to owners during the period, and the related
amount per share present either in the Statement of Changes in Equity; or In the Statement of
cash flows.

Below is a typical Statement of Changes in Equity

Share Share Revaluation Retained Total

Capital Premium Surplus Earnings Equity
Brought forward 270 80 20 235 605
Total comprehensive 100 57 157
income for the year
Dividends -27 -27
Carried Forward 270 80 120 265 735

More detail on statement of cash flows will be copiously treated in IAS 7

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DISCLOSURES: Notes to the Account

Specifies minimum note disclosures which include information about:

 Disclosure that the financial statements of an entity comply fully with International
Financial Reporting Standards, this fact should be disclosed;
 The judgments that management has made in the process of applying the entity’s
accounting policies that have the most significant effect on the amounts recognized in
the financial statements;
 Sources of estimation uncertainty;
 Information about management of capital and compliance with capital requirements.
 Dividends proposed or declared before the financial statements were authorized, but
not recognized as distribution during the period
 Cumulative preference dividends not recognized
 Legal corporate information if not disclosed elsewhere
 Domicile and legal form of the entity
 Country of incorporation
 Address of registered office
 Description of nature of entity's operations and principal activities
 Name of parent and ultimate parent of group

I hope this material threw more light on the Presentation of Financial Statements –IAS 1.
Watch out for the questions and solutions edition of IAS 1. You’ll be glad you did.
You can get more topics on Financial Reporting on adedamolaotun.blogspot.com.
You are free to drop your comments as well. You can also get a free update of each IFRS blog by
subscribing with your email on the blog.

Regards,
Adedamola Otun
tnadedamola@gmail.com

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