In our previous article Considerations for the presentation of financial statements in the Accounting 101 series, we have explained that the IAS 1 Presentation of Financial Statements covers various components and principles in the preparation of the financial statements. In that article, we have shared with you the first two components covered in IAS 1 – a complete set of financial statements and the general features of financial statements. For this round, we will share with you the remaining two components which are the structure and content of financial statements as well as other disclosures in the financial statements as required by IAS 1. You will be able to understand what are the minimum general information required to be disclosed in the financial statements and what are the things entities should consider in structuring and presenting their financial statements.
What are the required structure and content of the financial statements?
There are few areas covered by IAS 1 regarding the structure and content of the financial statements, they are the requirements for:
- the identification of the financial statements;
- the statement of financial position;
- the statement of profit or loss and other comprehensive income;
- the statement of changes in equity;
- the statement of cash flows; and
- the notes to the financial statements.
Let’s now briefly go through the requirements above.
Identification of the financial statements
IAS 1 requires an entity to clearly and prominently display the following information, including to repeat where necessary for the users of the financial statements to identify the entity’s financial statements:
- The name of the reporting entity. If the name has changed since the previous reporting period, this information should also be disclosed. In practice, if an entity has changed its name, the new name will be displayed together with the ‘formerly known’ old entity’s name.
- The financial statements prepared are separate financial statements or a group of entities. In practice, when the financial statements are prepared for both the individual and a group of entities, the financial statements and corresponding financial information are clearly labelled as ‘company’ or ‘group’.
- The date of the end of the reporting period or period covered by the financial statements.
- The presentation currency used in the preparation of the financial statements.
- The level of rounding used in presenting the amounts in the financial statements. Entities can either round the amount such as to the nearest thousands or millions or use the exact amount in the financial statements.
Statement of financial position
There is a long list of line items provided in paragraph 54 of IAS 1 that should be presented in the statement of financial position (if those items are material). These line items are generally items that are sufficiently different in nature or function, hence warrant a line item on its own. However, entities will still need to assess whether the presentation of additional line items is required on the following basis:
- The nature and liquidity of the assets;
- The function of assets within the entity; and
- The amount, nature and timing of liabilities.
IAS 1 also allows for an entity to present subtotals in the statement of financial position, so long that they are relevant to the users’ understanding.
Another important principle in IAS 1 is that entities are generally required to present their statement of financial position based on current and non-current classification. This means, in the statement of financial position, entities are required to present current and non-current assets and current and non-current liabilities. An exception to the current and non-current classification is when a presentation based on liquidity provides information that is more relevant and reliable. The financial statements of entities in the financial services industry such as commercial banks, investment banks and insurance entities are generally prepared based on liquidity.
Because of the need to present current and non-current classification in the statement of financial position, IAS 1 also provides guidance on such classification. We have explained in our article – Liability and equity – the current and non-current classification of liabilities. For current and non-current classification of an asset, IAS 1 states that an asset is classified as current when:
- an entity expects to realise the asset, or intends to sell or consume it in its normal operating cycle;
- an entity holds the asset primarily for the purpose of trading;
- an entity expects to realise the asset within twelve months after the reporting period; or
- the asset is cash or cash equivalent unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.
An asset that does not meet any of the above should be classified as a non-current asset. IAS 1 however, provides an exception to deferred tax assets and liabilities. Deferred tax assets and liabilities should not be classified as current assets or liabilities. Instead, deferred tax is classified as non-current in the statement of financial position.
Statement of profit or loss and other comprehensive income
IAS 1 allows entities to present a statement of profit or loss and other comprehensive income either as a single statement (i.e., statement of comprehensive income) or as a two-separate statement. In a single statement, there will be two sections which are the profit or loss section followed directly by the other comprehensive income section. Total comprehensive income will be the total of the two sections. On the other hand, in the two-separate statement, the statement of profit or loss is segregated from the statement of comprehensive income. Let’s see examples based on the publicly available audited financial statements for you to be able to compare and contrast the two approaches:
- Manforce Group Berhad’s audited financial statement for the financial year ended 30 September 2020
- Bursa Malaysia Berhad’s audited financial statements for the financial year ended 31 December 2019
Similar to the statement of financial position, IAS 1 also stipulates line items that need to be presented in the statement of profit or loss or profit or loss section (under single-statement approach) if they are material. As for the items in the other comprehensive income, IAS 1 requires items to be further segregated to items that will not be reclassified and items that will be reclassified to profit or loss.
Items in the statement of profit or loss or the profit or loss section are required to be presented either based on their nature or function within the entity. Either presentation based on nature or function, the selection made must be based on providing more relevant and reliable information to the users.
Statement of changes in equity
Important principles are also included in IAS 1 with regard to the presentation of the statement of changes in equity. IAS 1 emphasise that entities must include the following information in the statement of changes in equity:
- the separation of total amounts attributable to owners and non-controlling interest in relation to the total comprehensive income for the period;
- the effect of retrospective application or restatement on each component of equity; and
- the reconciliation between the beginning amount and the closing amount for each component of equity.
Additionally, IAS 1 also provides some other requirements on information to be presented either in the statement of changes in equity itself or the notes to the financial statements.
Statement of cash flows
IAS 1 does not provide any explicit requirements with regard to the statement of cash flows. This is because there is a specific or separate standard on its own that governs the requirement for the statement of cash flows. IAS 1 makes reference to IAS 7 Statement of Cash Flows for the presentation and disclosure of cash flow information.
Notes to the financial statements
The general principles on the information that needs to be presented and disclosed in the notes to the financial statements are:
- information on the basis of preparation of the financial statements and specific accounting policies used or adopted by the entities;
- disclosures of information required by IFRS that are not presented elsewhere in the financial statements; and
- to provide information that is relevant to users’ understanding but not presented elsewhere in the financial statements.
Other important disclosures that need to be made by an entity are:
- the significant judgment that entities have made in the process of applying the entities’ accounting policies. The significant judgment made are those that have the most significant effect on the amounts recognised in the financial statements.
- the significant assumptions that entities made about the future and other major sources of estimation uncertainty at the end of the reporting period. The assumptions and estimation uncertainty should have a significant risk of resulting in material adjustments to the numbers of assets and liabilities reported in the financial statements within the next financial year.
- Disclosure on the capital management by the entity. It covers the objective, policies and processes for managing capital. The disclosure on capital management should also include whether an entity complies or has not complied with any externally imposed capital requirement and the consequence if not comply.
Future development on the structure and content of the financial statements: What’s next?
It is also interesting to bring to your attention that the International Accounting Standards Board (“IASB”) has embarked into the Better Communication in Financial Reporting project with few project themes. The project is designed to help make financial information more useful and improve the way financial information is communicated to users. An exposure draft on General Presentation and Disclosures was issued back in December 2019. The exposure draft proposed changes or amendments to the requirements about the information on the performance of the profit or loss. Besides, some limited changes to the statement of cash flows and the statement of financial position were also proposed. At this juncture, the IASB is still deliberating the comments received from the public and future direction on the project.
The discussion on the general presentation, structure and content of financial statements in our Accounting 101 series remain relevant until the IASB finalises any amendments to the existing requirements. We will keep you posted on future development in this area. Till then. Stay tuned!