Presentation of financial statements (ias 1) - Structure, mi...

Learning Outcomes

After reading this article, you will be able to explain the key requirements of IAS 1, including the structure of financial statements, the minimum content required for compliance, and the rules for classifying and presenting assets, liabilities, equity, and components of profit or loss. You will also understand principles for fair presentation, materiality, consistency, and comparative information—essential knowledge for exam preparation.

ACCA Strategic Business Reporting (SBR) Syllabus

For ACCA Strategic Business Reporting (SBR), you are required to understand how IAS 1 governs the presentation and classification of information in financial statements. In particular, focus your revision on the following syllabus areas:

• The required components and structure of a complete set of financial statements under IAS 1
• The minimum content required for statements of financial position and profit or loss and other comprehensive income
• The distinction and presentation of current vs. non-current assets and liabilities
• Application of fair presentation, going concern, consistency, materiality, aggregation, offsetting, and comparative information requirements
• Disclosure and classification principles, including notes to the accounts and accounting policies

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 is not a required component of a complete set of financial statements under IAS 1?
   1. Statement of financial position
   2. Statement of profit or loss and other comprehensive income
   3. Statement of retained earnings
   4. Notes to the accounts
2. Under IAS 1, when should an asset be classified as current?
   1. When it is expected to be realised in more than twelve months
   2. When it is held for trading
   3. When it is a non-monetary asset
   4. When its settlement will occur after 12 months

3. True or False? Offsetting assets and liabilities is generally not permitted unless specifically required or permitted by an IFRS Standard.

4. List three situations in which a liability must be classified as current.

Introduction

IAS 1 Presentation of Financial Statements sets the standards for how entities must present their annual financial statements, ensuring comparability both with the entity's previous periods and with other entities. This article covers the structure and minimum content required by IAS 1, alongside the principles of classification (current/non-current) and general presentation rules. Proficiency in these areas is essential for producing compliant statements and for ACCA SBR exam success.

Required Components of Financial Statements

A complete set of financial statements under IAS 1 must contain:

• Statement of financial position at the end of the period
• Statement of profit or loss and other comprehensive income (single statement or two statements)
• Statement of changes in equity for the period
• Statement of cash flows
• Notes, including a summary of significant accounting policies

No part of the annual report outside these statements or the accompanying notes is governed by IAS 1, though other standards may introduce additional disclosure requirements.

Key Term: Statement of financial position
A statement that presents an entity’s assets, liabilities, and equity at a specific point in time.

The Structure and Minimum Content

IAS 1 prescribes the order and minimum line items to present on each statement for clarity and comparability.

Statement of Financial Position

At a minimum, the following line items must be presented:

• Property, plant and equipment
• Investment property
• Intangible assets
• Financial assets and financial liabilities (with required breakdowns)
• Inventories
• Trade and other receivables and payables
• Cash and cash equivalents
• Equity components (e.g., share capital, retained earnings)
• Provisions
• Deferred tax assets and liabilities

Material classes of similar items are presented separately; immaterial items may be aggregated. Items differing in nature or function are not to be combined.

Key Term: Materiality
Information is material if its omission or misstatement could influence the users' economic decisions.

Statement of Profit or Loss and Other Comprehensive Income (OCI)

Entities may present this as a single statement or split into two: a statement of profit or loss and a statement of OCI. At a minimum, present separately:

• Revenue
• Finance costs
• Tax expense
• Profit or loss
• Each component of OCI, grouped into items that will or will not be subsequently reclassified to profit or loss

Other required disclosures include profit or loss and total comprehensive income attributable to owners of the parent and to non-controlling interests.

Statement of Changes in Equity

Show changes in each component of equity, including:

• Total comprehensive income for the period
• The effects of retrospective application or restatement
• Transactions with owners (e.g., dividends, share issues)

Statement of Cash Flows

The structure is governed by IAS 7 but must be included alongside other statements.

Notes to the Accounts

Notes provide supporting information, accounting policies, and breakdowns of key figures.

Presentation Principles

IAS 1 sets general requirements to guide consistent and transparent reporting.

Fair Presentation and Compliance

Financial statements must fairly present the entity's financial position and comply with all IFRS Standards. If standards are insufficient, provide additional information necessary for clarity.

Key Term: Fair presentation
Representation of transactions, events, and conditions faithfully, ensuring relevance and reliability for users.

Going Concern

Statements should be prepared with the assumption that the entity will continue operating for the foreseeable future. If this assumption is inappropriate, full disclosure is required.

Key Term: Going concern
The assumption that an entity will remain in operation for the next 12 months and beyond.

Accrual Basis

Except for cash flow information, all elements are recorded on an accrual basis—recognised when they occur, not when cash is received or paid.

Consistency of Presentation

Keep the presentation and classification of items consistent from one period to the next unless:

• A different presentation is required by an IFRS Standard
• A change will provide more relevant or reliable information

Aggregation, Materiality, and Offsetting

Aggregate immaterial items with similar characteristics. Do not offset assets and liabilities, or income and expenses, unless required or permitted by an IFRS Standard.

Comparative Information

Present comparative information for all amounts in the current period's financial statements. Additional comparative statements must be included if they improve understanding.

Classification of Items

A key aspect of presentation is classifying assets and liabilities as either current or non-current.

Current/Non-Current Distinction

Assets are current if:

• Expected to be realised or consumed in the entity’s normal operating cycle
• Held primarily for trading
• Expected to be realised within 12 months after the reporting date
• Cash or a cash equivalent (unless restricted for longer than 12 months)

All other assets are non-current.

Liabilities are current if:

• Expected to be settled in the normal operating cycle
• Held primarily for trading
• Due to be settled within 12 months after the reporting date
• The entity does not have the right at the reporting date to defer settlement for at least 12 months

All other liabilities are non-current.

Key Term: Current asset
An asset expected to be realised or consumed within 12 months or in the entity’s normal operating cycle, whichever is longer.

Key Term: Current liability
A liability due to be settled within 12 months or in the entity’s normal operating cycle, or one for which the entity does not have a right to defer settlement.

Worked Example 1.1

Example:
Green Ltd manufactures bicycles. At year-end, it has the following liabilities:

• $1 million bank loan due in 10 months
• $2 million trade payables from inventory purchases
• $500,000 of long-term bonds maturing in five years, but callable by the lender within 11 months

Required:
Determine which liabilities are classified as current under IAS 1.

Answer:
The bank loan and trade payables are both current liabilities—expected to be settled within 12 months or the normal operating cycle. The callable bonds are also current, since the lender can require settlement within 12 months and Green Ltd does not have an unconditional right to defer payment.

Worked Example 1.2

Example:
Sunrise plc produces cheese with a maturation period of 15 months. Should inventories in process be classified as current or non-current assets at the balance sheet date?

Answer:
Inventories are current assets, as they are realised in the entity's normal operating cycle, even if this cycle extends beyond 12 months.

Exam Warning

In exam scenarios, always check if the entity's operating cycle exceeds twelve months—if so, inventories and related receivables remain current even if not realised within twelve months.

Additional Presentation Requirements

• Clearly identify each statement and distinguish them from other information.
• Disclose the reporting period, entity name, currency, rounding, and level of reporting (single, group).
• Present each material class of similar items separately; do not aggregate items with differing characteristics.

Detailed Notes to the Accounts

Notes should:

• Present information in a systematic order, usually the order items are shown in the statements
• Include a summary of significant accounting policies
• Disclose judgements, estimates, and measurement bases used
• Detail supporting information for amounts presented

Changes in Presentation or Classification

If presentation or classification changes, restate comparative information unless it is impracticable.

Summary

IAS 1 sets clear rules on the structure and classification of financial statements. It requires the consistent presentation of key statements, mandates separation of current and non-current items, and enforces materiality, aggregation, and comparative information. These principles ensure that financial statements provide users with reliable, relevant, and comparable information for decision-making.

Key Point Checklist

This article has covered the following key knowledge points:

• List the required components of a complete set of financial statements under IAS 1
• Describe the minimum required line items for the statement of financial position and profit or loss and OCI
• Explain rules for current/non-current classification of assets and liabilities
• Apply principles of fair presentation, going concern, materiality, and consistency
• Identify when offsetting or aggregation is appropriate
• Understand the role and content of notes to the accounts

Key Terms and Concepts

• Statement of financial position
• Materiality
• Fair presentation
• Going concern
• Current asset
• Current liability