Presentation of financial statements (IAS 1) - Notes, accoun...

Learning Outcomes

After reading this article, you will be able to explain the requirements of IAS 1 regarding notes to the financial statements, accounting policies, and fair presentation. You will distinguish between accounting policy changes and estimates, describe the disclosures required in notes, and set out the principles of faithful representation and compliance with IFRS in presenting financial statements.

ACCA Financial Reporting (FR) Syllabus

For ACCA Financial Reporting (FR), you are required to understand the framework and required disclosures for preparing and presenting financial statements. In particular, focus your revision on:

• The components and content of notes accompanying primary statements, as specified by IAS 1
• The meaning of "fair presentation" and compliance with IFRS Accounting Standards
• The identification, selection, and disclosure of accounting policies (IAS 1 and IAS 8)
• Distinction between changes in accounting policy and changes in accounting estimates
• Required disclosures when an entity departs from an IFRS Accounting Standard to achieve fair presentation
• The sequence, structure, and referencing of notes

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following must be disclosed in the notes to the financial statements according to IAS 1?
   1. Only items required by law
   2. Accounting policies, judgements, and supporting information
   3. Only management commentary
   4. None of the above

2. True or false? A change from straight-line to reducing balance depreciation is a change in accounting policy and must be applied retrospectively.

3. According to IAS 1, what is meant by 'fair presentation' in financial statements?

4. If an entity applies an accounting policy not required by a specific IFRS, what disclosure must it make?

Introduction

IAS 1 Presentation of Financial Statements sets out requirements for the general purpose financial statements of entities. In addition 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), IAS 1 prescribes detailed rules for the accompanying notes. These notes provide essential context, policy disclosures, and supporting information required for a clear and faithful presentation.

The aim of IAS 1 is to ensure that users receive relevant, comparable, and understandable information, supported by consistent application of accounting policies and proper explanation of estimates and judgements.

Key Term: fair presentation
Fair presentation means faithfully representing the effects of transactions, other events, and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income, and expenses. This usually requires compliance with IFRS Accounting Standards.

THE ROLE OF NOTES TO THE FINANCIAL STATEMENTS

IAS 1 requires that a complete set of financial statements includes explanatory notes. These notes are essential for understanding the numbers and policies applied in the primary statements.

The notes must:

• Present information about the basis of preparation and the specific accounting policies used
• Disclose any key judgements, assumptions, or estimation uncertainties
• Support and explain the line items in the primary statements through breakdowns or additional narrative
• Set out compliance with IFRS Accounting Standards, and any departures where required to achieve fair presentation

IAS 1 sets out a recommended order for presenting notes:

1. Statement of compliance with IFRS Accounting Standards
2. Summary of significant accounting policies
3. Supporting information for line items in the statements
4. Other required disclosures

All notes must be clearly cross-referenced to the relevant items in the primary statements.

Key Term: accounting policies
Specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.

SELECTION AND DISCLOSURE OF ACCOUNTING POLICIES

Accounting policies are fundamental to the preparation of financial statements. IAS 1 states that policies should be selected and applied consistently for similar transactions and events, unless an IFRS specifically requires or permits categorisation.

Significant accounting policies must be disclosed in the notes, including:

• Recognition and measurement bases (e.g., historical cost, fair value)
• Policies for key areas (revenue, inventory, leases, etc.)
• Any policy required by an IFRS

When a standard allows more than one treatment (e.g., cost vs. revaluation model for PPE), the policy chosen must be explained. Where there is no specific IFRS that applies, management should use judgement to develop and apply a policy that results in relevant and faithfully represented information.

Changes in Accounting Policies and Estimates

IAS 8 distinguishes between a change in accounting policy and a change in accounting estimate:

Key Term: change in accounting policy
A change in the specific principles, bases, conventions, rules, or practices applied; for example, switching from FIFO to weighted average for inventory valuation.

Key Term: change in accounting estimate
An adjustment arising from new information or developments, affecting the carrying amount of an asset or liability. Examples include revising the useful life of an asset.

A change in policy must be applied retrospectively, unless impracticable, with restatement of prior periods, whereas a change in estimate is applied prospectively.

Disclosure is required in the notes for:

• The nature of the change
• The reason for the change
• The impact of the change on current and prior periods

Worked Example 1.1

Meg Ltd previously valued inventory on a FIFO basis but decides in 20X4 to adopt weighted average cost. Explain the disclosure and accounting treatment required.

Answer:
This is a change in accounting policy (IAS 8). Meg Ltd must apply the new policy retrospectively, restating prior period figures as if weighted average cost had always been used. The notes should explain the nature of the change and its impact on current and prior periods.

Presenting Policies and Notes

Significant policies should be placed together in one section of the notes. Each note should be clearly labelled and appropriately cross-referenced to the primary statements. Where relevant, policies may be provided alongside the supporting information for each line item.

FAIR PRESENTATION AND COMPLIANCE WITH IFRS

IAS 1 requires a fair presentation in financial statements, which generally means compliance with all relevant IFRS Accounting Standards. Entities must:

• Present financial statements faithfully, with all material information disclosed
• Avoid offsetting assets and liabilities, or income and expenses, unless permitted by an IFRS
• Disclose compliance with IFRS explicitly in the notes

If, in extremely rare circumstances, management concludes that compliance with an IFRS would be misleading, and departing from it is required to achieve fair presentation, the entity must disclose:

• That it has departed from the relevant IFRS
• The nature of, and reason for, the departure
• The financial impact of the departure

Exam Warning

A common error is to misclassify a change in accounting estimate (such as revising the useful life of a machine) as a change in accounting policy. Exam questions may require you to identify the difference and the correct disclosure.

SUMMARY OF DISCLOSURE REQUIREMENTS

Key note disclosures required by IAS 1 include:

• Statement of compliance with IFRS
• Description of measurement bases
• Summary of significant accounting policies
• Disclosure of judgements in applying policies
• Disclosure of estimation uncertainties
• Detailed breakdowns of line items
• Major sources of estimation uncertainty and related risks

Notes should be presented in a systematic order, and cross-referenced for clarity.

Key Point Checklist

This article has covered the following key knowledge points:

• Define "fair presentation" and explain its link to compliance with IFRS Accounting Standards
• List the required contents and purposes of notes to the financial statements
• Distinguish between changes in accounting policies and accounting estimates, and understand the required disclosures for each
• State the required order and referencing system for notes as set out in IAS 1
• Identify when notes must disclose departures from IFRS to achieve fair presentation

Key Terms and Concepts

• fair presentation
• accounting policies
• change in accounting policy
• change in accounting estimate