Chapter 3: General features

Fair presentation

Financial statements should present fairly the financial position, financial performance, and cash flows of an entity. Fair presentation requires the faithful representation of the effects of transactions, other events, and conditions by the definitions and recognition criteria for assets, liabilities, income, and expenses set out in the Framework.

The application of IFRS standards, with additional disclosure where necessary, is presumed to result in financial statements that achieve a fair presentation.

An “explicit and unreserved statement of compliance” should be included in the notes to the financial statements. Entities cannot state that their financial statements are IFRS-compliant if they do not comply with all of the requirements of IFRS. Financial statements either comply with IFRS or do not; there is no middle ground.

‘IFRS’ is defined as standards and interpretations adopted by the Board. These comprise International Financial Reporting Standards and International Accounting Standards, together with interpretations issued by the IFRS IC (or its predecessor bodies).

Disclosures, in addition to those set out in specific IFRS standards, are required where users of the financial statements must understand transactions or events of the reporting entity. Disclosure or explanation is not a substitute for proper accounting.

A fair presentation is nearly always achieved through compliance with applicable IFRS standards. For a fair presentation, an entity:

1. selects and applies accounting policies under IAS 8; IAS 8 sets out a hierarchy of authoritative guidance that management considers in the absence of an IFRS that specifically applies to an item;
2. presents information, including accounting policies, in a manner that provides relevant, reliable, comparable, and understandable information; and
3. provides additional disclosures where compliance with the specific requirements in IFRS standards 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.

Fair presentation and true and fair overrides

IFRS presumes that a fair presentation is achieved if financial statements are prepared in compliance with each applicable standard and interpretation.

An entity departs from an IFRS requirement if, in extremely rare circumstances, compliance with that requirement would be so misleading that it would conflict with the objective of financial statements set out in the Framework, so long as the relevant regulatory framework requires or does not prohibit it.

Departure from IFRS is necessary only where, even if additional disclosure is made, a fair presentation cannot be achieved by applying IFRS.

An entity that overrides an IFRS requirement discloses information about that departure from IFRS. These disclosures relate to the details of, reasons for, and the effect of, the departure.

An entity departs from an IFRS requirement only after management has considered why the objective of that requirement is not met or is not relevant in its particular circumstances.

Management also considers how the entity’s circumstances differ from other entities that comply with the relevant IFRS requirement. There is a rebuttable presumption that, if other entities in similar circumstances comply with the requirement, the entity should also comply.

A departure from an IFRS requirement might affect more than one accounting period. IAS 1 requires disclosures related to any prior period departure from IFRS.

For example, there will be an effect on the following period’s measurement of changes in assets and liabilities where an entity departs from a requirement concerning the measurement of assets or liabilities.

An entity’s regulatory framework might prohibit an IFRS override that management considers necessary to achieve a fair presentation. This will be extremely rare. The entity makes specified disclosures in such cases to reduce the perceived misleading aspects of compliance.

Going concern

Financial statements should be prepared on a going concern basis, unless management intends either to liquidate the entity or to cease trading, or has no realistic alternative but to do so.

Management is required to assess, at the time of preparing the financial statements, the entity’s ability to continue as a going concern, and this assessment should cover the entity’s prospects for at least 12 months from the end of the reporting period.

The 12-month period for considering the entity’s future is a minimum requirement; an entity cannot, for example, prepare its financial statements on a going concern basis if it intends to cease operations 18 months from the end of the reporting period.

The existence of significant doubts about the entity’s ability to continue as a going concern is not sufficient reason to depart from preparing financial statements on a going concern basis.

The determination of going concern should be made for each reporting entity. A going concern basis might not be considered appropriate for an individual subsidiary, while the going concern basis might remain appropriate for the subsidiary’s parent and the group as a whole.

The assessment of the entity’s status as a going concern will often be straightforward. A profitable entity with no financing problems will almost certainly be a going concern.

In other cases, management might need to consider very carefully the entity’s ability to meet its liabilities as they fall due. Detailed cash flow and profit forecasts might be required to satisfy management that the entity is a going concern.

Departure from going concern basis only in exceptional circumstances

Preparing financial statements on a concern basis when the entity is experiencing severe financial difficulties

It is important to note that when an entity prepares financial statements on a going concern basis, this does not imply an absolute level of confidence that the entity will be able to continue as a going concern.

Even when an entity is in severe financial difficulties, IAS 1 requires the going concern basis to be used unless management either intends to liquidate the entity or to cease trading or has no realistic alternative but to do so.

Accordingly, an entity will depart from the going concern basis only when it is, in effect, clear that it is not a going concern. When there is significant uncertainty over whether an entity can continue in operational existence, IAS 1 requires the going concern basis to be used and appropriate disclosures to be made.

When there are doubts about an entity’s ability to continue trading, the fact that the going concern basis must be used does not eliminate the need to consider whether any assets should be written down to their recoverable amounts and whether provision is required for any unavoidable costs under onerous contracts.

Period to be covered by management’s going concern assessment

In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future. IAS 1 states that the information should cover at least 12 months from the end of the reporting period but not be limited to that period. The degree of consideration depends on the facts in each case.

When an entity has a history of profitable operations and ready access to financial resources, a conclusion that the going concern basis of accounting is appropriate may be reached without detailed analysis.

In other cases, management may need to consider a wide range of factors relating to current and expected profitability, debt repayment schedules, and potential sources of replacement financing before it can satisfy itself that the going concern basis is appropriate.

Impairment indicator – directors considering whether to cease trading – example

The directors of an entity are considering whether to cease trading. At the date of preparation of the financial statements, the directors have not yet reached a decision.

There is a reasonable possibility that the entity will continue to trade and, therefore, the financial statements are being prepared on a going concern basis.

It is usually appropriate to regard the fact that the directors are considering ceasing to trade as an indication of impairment. The directors of an entity do not usually consider ceasing to trade if the entity is expected to be profitable.

The fact that the directors are considering ceasing to trade may call into question the ability of the entity to continue to trade profitably and, therefore, whether the carrying amounts of assets are recoverable.

Disclosure required of material uncertainties regarding the entity’s ability to continue as a going concern

When making its assessment of the entity’s ability to continue as a going concern, if management is aware of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to do so, those uncertainties should be disclosed.

IAS 1 does not explain what it means for an entity to ‘continue as a going concern’, so it is appropriate to look to the Conceptual Framework. The Conceptual Framework explains that financial statements “are normally prepared on the assumption that the reporting entity is a going concern and will continue in operation for the foreseeable future.

Hence, it is assumed that the entity has neither the intention nor the need to enter liquidation or to cease trading”.

Disclosures are required when events or conditions cast significant doubt over the entity’s ability to continue as a going concern – for example

In the course of preparing its financial statements, Entity A considers (as required by IAS 1:25) whether events or conditions exist that cast significant doubt upon its ability to continue as a going concern. Management’s initial assessment indicates that such conditions may exist.

However, after detailed consideration of the extent of the risk and of the feasibility and effectiveness of Entity A’s planned mitigation, it is concluded that no material uncertainty exists related to these conditions that require disclosure following IAS 1.

Reaching this conclusion involves the application of significant judgment on the part of management and those charged with governance.

IAS 1 requires an entity to disclose the judgments made in applying its accounting policies and that have the most significant effect on the amounts recognized in the financial statements.

Entity A should disclose the significant judgment applied in concluding that no material uncertainty exists that requires disclosure under IAS 1. As reported in the July 2014 IFRIC Update, the IFRS Interpretations Committee concluded that the requirements of IAS 1

“apply to the judgments made in concluding that there remain no material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern”.

While, in the circumstances described, Entity A has concluded that there are no material uncertainties of this nature, the process of reaching that conclusion required the exercise of significant judgment. The going concern assumption can significantly affect the amounts recognized in the financial statements and, as such, the requirements of IAS 1 must be applied.

In addition to the requirements detailed above, entities should also consider any requirements of law or regulation in their jurisdiction to disclose details of risks relating to their ability to continue as a going concern.

Disclosures are required when financial statements are not prepared on a going-concern basis

If financial statements are not prepared on a going concern basis, the financial statements should disclose that fact, together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern.

Before considering further the appropriate basis of preparation for the financial statements of an entity that will cease or that has ceased trading, it is worth considering whether statutory financial statements will be required at all. This will depend on the legal and regulatory requirements in the relevant jurisdiction.

Impairment of assets when financial statements are not prepared on a going concern basis

It is always appropriate to consider the need to recognize impairment losses when an entity is planning to cease or has already ceased trading. This assessment will require a comparison of the carrying amount of an asset (or, when appropriate, a cash-generating unit) with the higher of its value in use and fair value less costs of disposal.

The question arises as to whether, in such circumstances, it is possible to assess impairment by reference to a value-in-use calculation.

In theory, it is possible to assess the impairment of assets by reference to a value-in-use calculation even when the financial statements are prepared on a basis other than that of a going concern.

However, in practice, often the cash flows forecast to arise from the continuing use of such assets are not significant because the expectation is that the assets will be sold or abandoned shortly.

In such circumstances, the amounts arrived at using a value-in-use calculation will not be materially different from the fair value less costs of disposal.

Using a basis other than that of a going concern for preparing financial statements

Even if an entity has ceased trading, if the entity wishes to state compliance with IFRS Standards then its financial statements should be prepared on a basis that is consistent with IFRS Standards but amended to reflect the fact that the going concern assumption is not appropriate.

Among other things, such a basis requires writing assets down to their recoverable amounts. It also requires recognizing liability for contractual commitments that may have become onerous as a consequence of the decision to cease trading.

Although it is neither defined nor mentioned within IFRS Standards, some jurisdictions have a concept of financial statements prepared on a ‘break-up’ basis. Under this basis, it is argued that the objective of the financial statements changes from reporting financial performance to

(1) considering whether the assets of the entity are sufficient to meet its liabilities, and

(2) quantifying the amount of any surplus that may, in due course, be available for distribution to the shareholders.

Using this break-up basis, liability would be recognized for losses arising after the end of the reporting period and for the costs of winding up the business, irrespective of whether an irrevocable decision to terminate the business had been made at the end of the reporting period.

Assets would also be restated to their actual or estimated sale proceeds, even if this was different from their market value at the end of the reporting period.

In effect, on a break-up basis, the accruals concept ceases to be of importance and the financial statements become a forecast of future realization rather than a reflection of transactions and other events that have occurred in the reporting period.

The preparation of financial statements on this basis does not properly reflect the principles of IFRS Standards and is not considered appropriate under IFRS Standards except perhaps in very rare circumstances.

This is because, under IFRS Standards, the financial statements should reflect the transactions and other events that have occurred in the reporting period and the circumstances existing at the end of the reporting period.

For example, if the assets include quoted securities, it is difficult to see why these should be measured above or below their market value even if they are sold for a higher or lower amount after the end of the reporting period.

The gain or loss on disposal in the subsequent period reflects the decision to hold the securities rather than to sell them at the end of the reporting period. For similar reasons, it would not be appropriate to recognize provisions for future losses or liabilities for which there was no present legal or constructive obligation at the end of the reporting period.

Classification of non-current assets and long-term liabilities when using a basis other than that of a going concern

When financial statements are being prepared under IFRS Standards but on a basis other than that of a going concern, another issue to consider is whether non-current assets and long-term liabilities should be reclassified as current assets and current liabilities.

As discussed, assets classified as non-current by IAS 1 should not be reclassified as current assets unless and until they meet the ‘held for sale’ criteria in IFRS 5. The held-for-sale criteria may be met for some non-current assets but not others, e.g., if the entity is actively marketing some of the assets but not others.

Long-term liabilities should be reclassified as current liabilities if they meet the criteria in IAS 1 to be presented as current liabilities.

Reclassification may be required, for example, because of breaches of borrowing covenants or similar factors in existence at the end of the reporting period that accelerate the repayment requirements, with the result that the entity no longer has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period.

Appropriate basis of preparation for entities that become dormant

IAS 1 and IAS 10 require a departure from the going concern basis in specified circumstances. In particular, an entity should not prepare its financial statements on a going concern basis if:

• at the end of the reporting period, management intends to liquidate the entity or to cease trading (or has no realistic alternative but to do so); or
• management determines after the reporting period that it intends to liquidate the entity or to cease trading (or has no realistic alternative but to do so).

Accordingly, when an entity ceases to trade during the year, or management has determined, either at the reporting date or after the reporting period, that it intends to liquidate the entity, any subsequent financial statements should also be prepared on a basis other than that of a going concern.

However, there is no guidance in either IAS 1 or IAS 10 regarding the appropriate basis of preparation for the financial statements of an entity that has ceased to trade during the year but which management intends to keep in existence (e.g., as a dormant company).

Financial statements prepared on a going concern basis would be extremely unlikely to give a true and fair view when the entity had already ceased trading before the end of the reporting period. When an entity has ceased trading during the year, the use of the going concern basis is likely to be very misleading to users of the financial statements who might reasonably assume that this basis implies that trading will continue in future periods.

Therefore, in the financial reporting period in which an entity ceases to trade it is, appropriate to prepare the financial statements on a basis other than that of a going concern to give sufficient emphasis to the effects of cessation of trading.

The question also arises as to what is an appropriate basis of preparation for such entities to use in later reporting periods when the entity is no longer trading but continues to exist (e.g., as a dormant company). Neither IAS 1 nor IAS 10 guides such circumstances.

To provide clarity to users of the financial statements, and to avoid the risk of giving a misleading impression regarding the trading status of the entity, one possible approach would be for the financial statements to be prepared on a basis other than that of a going concern until the only amounts reported in the current and prior year statements of comprehensive income and financial position related to the entity’s ongoing existence (i.e. any effects of ceasing to trade have been ‘washed through’).

Thereafter, the financial statements will no longer include any items relating to the trade that has ceased and, therefore, references to such cessation may be confusing. Instead, the financial statements should be prepared on a going-concern basis, by IAS 1.

Departure from going concern basis for an entity that becomes dormant – for example

Entity X has a December year-end. It ceases trading during 20X1 and finishes disposing of its assets during 20X2. By the 20X2 year-end, the only items in the statement of financial position are intragroup receivables and payables, which are not expected to be settled in the foreseeable future. The directors intend to keep Entity X in existence for the foreseeable future.

If the directors choose to apply the possible approach, the financial statements for each of the 20X1, 20X2, 20X3, and 20X4 reporting periods would be prepared on the following bases.

Other approaches may also be acceptable.

Appropriate basis of preparation for entities established as dormant

Appropriate basis of preparation for an entity that is established as dormant – for example

Entity Y is set up as a dormant company. It has never traded and the directors do not intend that it will trade in the future. The directors intend to keep Entity Y in existence as a dormant company for the foreseeable future.

The financial statements of Entity Y should be prepared on a going-concern basis. The criteria to depart from the going concern basis following IAS 1 have not been met because the directors do not intend either to liquidate the entity or to cease trading.

Uncertainty about the entity being a going concern An entity has incurred losses during the last four years, and its current liabilities exceed its total assets. The entity was in breach of its loan covenants and has been negotiating with the related financial institutions to retain their financial support. These factors raise significant doubt that the entity will be able to continue as a going concern. How should the financial statements disclose uncertainties that affect the entity’s ability to continue as a going concern? The financial statements should state that there is a material uncertainty which casts significant doubt on the entity’s ability to continue as a going concern and that the entity might not be able to realise its assets and discharge its liabilities in the normal course of business. The financial statements should describe the events and conditions that give rise to the material uncertainty and management’s proposed remedial actions. This disclosure should be included in the basis of preparation note. The financial statements should also disclose the possible effects on the financial position, or state that it is impracticable to measure them.

Disclosures are required where there are significant doubts about the entity’s ability to continue as a going concern. The uncertainties should be disclosed, even if the financial statements continue to be prepared on a going concern basis.

The disclosures should:

• adequately describe the principal events or conditions that give rise to significant doubt on the entity’s ability to continue in operation and management’s plans to deal with these events or conditions; and
• state clearly that there is material uncertainty related to events or conditions that might cast significant doubt on the entity’s ability to continue as a going concern, such that it might be unable to realize its assets and discharge its liabilities in the normal course of business.

Events that occur after the reporting period might indicate that the entity is no longer a going concern. An entity does not prepare its financial statements on a going concern basis if management’s post-year-end assessment indicates that it is not a going concern.

Any financial statements that are prepared after that assessment (including the financial statements in respect of which management is making the assessment) are not prepared on a going concern basis. This is consistent with IAS 10, which requires a fundamental change to the basis of accounting when the going concern assumption is no longer appropriate.

The financial statements should disclose, where relevant, that the financial statements are not prepared on a going concern basis and disclose the reasons why the entity is no longer considered a going concern. Details of the new basis of accounting adopted should be also disclosed.

Financial statements are normally prepared on the assumption that the reporting entity is a going concern. Assets and liabilities are usually recognized on the basis that their carrying amounts will be recovered or discharged in the normal course of business.

For example, the carrying values of property, plant, and equipment are supported by the expected future cash flows from their continued use and ultimate disposal. If the business is not a going concern, this basis will not be appropriate.

If the financial statements are prepared on a different basis, the basis used is disclosed. The financial effect of changing from a going concern to a non-going concern basis might be negligible but the financial statements should still disclose that the entity is no longer regarded as a going concern.

Non-going concern financial statements IFRS does not prescribe the basis of accounting for an entity that is not a going concern. Financial statements might be prepared on a liquidation or break-up basis, but sometimes this will be inappropriate. For example, an entity might be placed in administration, with liquidation/break-up being only one of the possible outcomes. The basis of accounting might be mandated by the administrator. The financial statements might be prepared under an accounting framework other than IFRS if the relevant legislation permits it. The measurement of assets and liabilities of an entity that is not a going concern might be affected by changes in judgements resulting from the entity’s liquidation or its cessation of trading. For example, estimates of recoverable amounts of assets might require revision, potentially resulting in the recognition of impairments to the carrying value of some assets. If the financial statements continue to be prepared in accordance with IFRS (but not on a going concern basis), it would not be appropriate to recognise the expected profit on the intended disposal of assets, either as a reduction in the amounts recognised as impairments or provisions or as uplifts in the carrying value of the relevant assets (although some entities might revalue property, plant and equipment in accordance with previously established accounting policies in the normal way). Some contracts might be regarded as onerous, requiring a provision. Provisions should not be made in respect of executory contracts (unless onerous) or restructuring costs that do not qualify as obligations at the balance sheet date.

Accrual basis of accounting

The entity should prepare its financial statements, except for cash flow information, using the accruals basis of accounting. Revenue and costs are recognized as they are earned or incurred under the accrual’s basis of accounting, rather than when the cash is received or paid.

The elements of financial statements (assets, liabilities, equity, income, and expenses) are recognized only when they meet the definitions and recognition criteria in the Board’s Conceptual Framework.

Materiality and aggregation

An entity presents each material class of similar items separately in the financial statements. Items of a dissimilar nature or function should be presented separately unless they are immaterial.

An immaterial line item is aggregated with other items, either on the face of the primary statements or in the notes. An item that is not sufficiently material to warrant separate presentation on the face of the financial statements might be sufficiently material to be presented separately in the notes.

The entity should consider all relevant facts and circumstances when deciding how it aggregates information. An entity should not obscure material information with immaterial information or by aggregating material items that have different natures or functions.

An entity need not provide a specific disclosure required by IFRS if the information resulting from that disclosure is immaterial. This is the case, even if the relevant IFRS standard contains a list of specific requirements or describes them as minimum requirements.

An entity should consider providing additional disclosure if compliance with specific IFRS requirements 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.

For annual periods starting on or after 1 January 2020, the definition of material is amended. Information is material if omitting, misstating, or obscuring it could reasonably be expected to influence decisions that the primary users of general-purpose financial statements make based on those financial statements, which provide financial information about a specific reporting entity.

Materiality depends on the nature or magnitude of information or both. The assessment of whether information, either individually or in combination with other information, is material is made in the context of an entity’s financial statements taken as a whole.

The amendments clarify that the reference to obscuring information addresses situations in which the effect is similar to omitting or misstating that information. Some circumstances in which a material item, transaction, or other event might be obscured are:

1. using vague or unclear language;
2. scattering information throughout the financial statements;
3. aggregating dissimilar items, transactions, or other events inappropriately;
4. disaggregating similar items, transactions, or other events inappropriately; and
5. reducing the understandability of financial statements by hiding material information with immaterial information to the extent that a primary user is unable to determine what information is material.

Financial reports are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyze the information diligently. Materiality is assessed against the decision-making of reasonably knowledgeable individuals.

The amendment described above also clarifies the meaning of ‘primary users of general-purpose financial statements’ to whom those financial statements are directed, by defining them as ‘existing and potential investors, lenders and other creditors’ that must rely on general-purpose financial statements for much of the financial information that they need.

Financial statements are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyze the information diligently.

Material items to be presented separately

Each material class of similar items is required to be presented separately in the financial statements. Items of a dissimilar nature or function should be presented separately unless they are immaterial.

Financial statements result from processing large numbers of transactions or other events that are aggregated into classes according to their nature or function. The final stage in this process is the presentation of condensed and classified data which form line items in the financial statements.

If a line item is not individually material, it is aggregated with other items either in those statements or in the notes. An item that is not sufficiently material to warrant a separate presentation in those statements may warrant a separate presentation in the notes.

Specifically:

• entities are required to decide, taking into consideration all relevant facts and circumstances, how they aggregate information in the financial statements, including the notes;
• an entity should not reduce the understandability of its financial statements by obscuring material information with immaterial information, or by aggregating material items that have different natures or functions;
• entities need not provide a specific disclosure required by an IFRS (including disclosures required in the notes) if the information resulting from that disclosure is immaterial. This is the case even if the IFRS lists specific requirements or describes them as ‘minimum’ requirements; and
• entities should consider whether additional disclosures are necessary when compliance with the specific requirements in IFRS Standards is insufficient to enable users of financial statements to understand the impact of particular transactions, other events and conditions on their financial position and financial performance.

A four-step approach to making materiality judgments

The Practice Statement sets out a four-step process as an example of how management could make materiality judgments when preparing financial statements. The steps involved are as follows.

Step 1 – identify potential material information, taking into account the requirements of applicable IFRS Standards and the information needs of primary users.

Step 2 – assess whether the information identified in Step 1 is material by considering quantitative and qualitative factors. The Practice Statement gives various examples of quantitative and qualitative factors and contains further guidance on how they affect the materiality assessment, both individually and on a combined basis.

Step 3 – organize the information identified in Step 2 in the draft financial statements in a way that communicates the information effectively and efficiently.

Step 4 – review the draft financial statements as a whole to determine whether all material information has been identified, including consideration of materiality from an aggregated perspective. Information that is judged not to be material on its own may be material when considered in combination with other information in the context of a complete set of financial statements.

This four-step approach is just one example of how the materiality assessment could be performed. Other methods may be appropriate.

Offsetting/netting

An entity is not permitted to offset net assets and liabilities or income and expenses, except where expressly required or permitted by IFRS.

Offsetting is generally prohibited because it detracts from users’ ability to gain a full and proper understanding of the transactions, other events, and conditions that have occurred and to assess the entity’s future cash flows.

Items that are not considered offsetting assets and liabilities include accumulated depreciation and amortization, provisions against inventory, and impairments provisions.

Presentation of withholding tax on revenue from investments – for example

Entity A pays dividends to Entity B. Entity B receives a net amount because Entity A is required to deduct withholding tax on dividends and to pay the amount deducted to the tax authorities on Entity B’s behalf.

It is not acceptable for Entity B to present its dividend revenue net of the tax withheld. Withholding tax is generally taken to mean a tax on dividends (or other income) that has been deducted by the payer of the income (Entity A) and is paid over to the tax authorities on behalf of the recipient of the dividends (Entity B) so that the recipient receives the net amount.

When the withholding tax is tax suffered by Entity B, it is appropriate to recognize the incoming dividends at an amount that is gross of the withholding tax and to present the tax withheld as part of the tax expense. Therefore, dividends from investments should be presented on a gross basis.

IAS 1 requires a specific line item for tax expense to be presented in the statement of comprehensive income. It follows that this line item should include all tax expenses, including withholding taxes suffered.

IFRS 15 requires an entity to measure revenue from contracts with customers at the amount of consideration to which the entity expects to be entitled in exchange for transferring promised goods or services.

For example, the amount of revenue recognized reflects any trade discounts and volume rebates allowed to the customer. Other transactions may be undertaken that do not generate revenue but are incidental to the main revenue-generating activities.

The results of such transactions are presented by netting any income and related expenses arising from the same transaction when this reflects the substance of the transactions or other events. For example:

• gains and losses on disposal of non-current assets, including investments and operating assets, are reported by deducting from the amount of consideration on disposal the carrying amount and related selling expenses; and
• expenditure related to a provision that is recognized by IAS 37 and reimbursed under a contractual arrangement with a third party (e.g., a supplier’s warranty agreement) may be netted against the related reimbursement.

Also, gains and losses arising from a group of similar transactions are reported on a net basis.

For example, foreign exchange gains and losses, and gains and losses arising on financial instruments held for trading, are presented net although they should be reported separately if material.

Acceptable offsetting of income and expenses Items that would be considered to be acceptable offsetting of income and expenses include: Income and related expenses on transactions that do not generate revenue and are incidental to the main revenue-generating activities (where that presentation reflects the substance of the transaction or event) such as: >Disposal proceeds and carrying value on disposal of non-current investment and operating assets. >Expenditure and related reimbursement under a contractual agreement (For example, a supplier’s warranty agreement). Gains and losses arising from a group of similar items unless material, where separate presentation is required such as: >Foreign exchange gains and losses. >Gains and losses arising on financial instruments held for trading. Netting of the components of defined benefit pension cost (For example, current service cost, past service cost). (The components and the line items in which they are included are disclosed separately in the notes.) Defined benefit plan expenses presented net of amounts recognised for a reimbursement. Expense relating to a provision presented net of amounts recognised for a reimbursement.

Presentation and calculation of gains arising on the sale of property, plant and equipment During the period, it sells one of its buildings and recognises a gain on the sale. How should management present the gain on sale of the building in the statement of comprehensive income? Proceeds or gains should not be classified as revenue. The entity should present the gain by netting the sale income with the carrying amount of the building and other related expenses. The gain on this transaction should be presented within operating profit (where operating profit is voluntarily disclosed), because IAS 1 requires operating profit to include all items that are clearly related to operations (including inventory write-downs, restructuring and relocation expenses). The gain or loss should be presented separately where the size, nature or incidence is such that separate disclosure is required. The entity can aggregate the gain, if appropriate, with amounts of a similar nature or function (for instance, other gains or losses on sale of other property, plant and equipment).

Frequency of reporting

Financial statements are presented at least annually. An entity discloses the reason for using a period other than one year when it changes the end of its reporting period and presents financial statements that are longer or shorter than one year. It also discloses that the comparative amounts are not comparable.

Entities are permitted to prepare financial statements for 52 weeks (rather than an exact year).

Meaning of ‘annual’ financial statements

IFRS Standards do not define an ‘annual’ reporting period. However, they do define an interim period – it is a “financial reporting period shorter than a full financial year” (see IAS 34). Therefore, the key feature that distinguishes annual financial statements from interim financial statements is that the former covers a full financial year.

The circumstances in which a financial year can be longer or shorter than 12 months will generally be specified by local laws or regulations. Most commonly, a longer or shorter period will be permitted when there is a formal change in reporting date, or when an entity is presenting first-year or cessation financial statements.

Frequently, the transition provisions of new Standards and amendments to Standards refer to applications for ‘annual periods beginning on or after’ a specified date. The reference to ‘annual’ periods in this context (which is intended to create a distinction from interim periods) is consistent with the reference to reporting ‘annually’ in IAS 1; an annual period for this purpose might therefore be a period of more or less than 12 months.

For practical reasons, some entities prefer to report on a 52/53-week basis (e.g., always to the last Saturday of the month). IAS 1 does not preclude this practice.

Disclosures are required when the end of the reporting period is changed

When the end of the reporting period is changed and the financial statements are presented for a period that is longer or shorter than one year, IAS 1 requires the following to be disclosed:

• the period covered by the financial statements;
• the reason for using a longer or shorter period; and
• the fact that the amounts presented in the financial statements are not entirely comparable.

Comparative information

An entity presents comparative information in respect of the preceding period for all amounts reported in the current period’s financial statements. This should include comparative information for narrative and descriptive information if it is relevant to understanding the current period’s financial statements.

An entity is required to present, as a minimum, two balance sheets, two statements of profit or loss and other comprehensive income, two separate statements of profit or loss (if presented), two cash flow statements two statements of changes in equity, and related notes.

An entity can provide financial statements beyond these minimum comparative requirements.

An entity provides an opening statement of financial position when an entity changes accounting policies, or when it makes retrospective restatements or reclassifications.

There are exemptions from the requirement to present comparative numerical information for some of the reconciliations of opening and closing positions.

For example, IAS 37 requires a reconciliation of the opening and closing provisions but does not require the disclosure of a comparative reconciliation. IAS 16 and IAS 38 require full comparative information on the movements in opening and closing positions. No exemption exists for the statement of changes in equity.

Comparative information for narrative and descriptive information

An entity does not have to give comparative narrative information if it is no longer relevant. Where a legal dispute was outstanding at the previous balance sheet date and has still not been resolved, the financial statements for the current period should disclose details of that dispute and of the steps that have been taken to resolve it.

If a legal dispute is settled during the year, the result of the dispute is disclosed where necessary to explain the entity’s performance for the period.

An entity might change the presentation or classification of items. The comparative figures should conform to the new presentation. The entity discloses the nature and amounts of each item or class of items that is reclassified and the reasons for the restatement of the comparative information. This disclosure also applies to the additional balance sheet presented at the beginning of the preceding period (see below).

An opening balance sheet is required when an entity applies a change in accounting policy retrospectively, makes a retrospective restatement of items, or reclassifies items in its financial statements, and this has a material effect on the information in the balance sheet at the beginning of the preceding period.

The additional balance sheet is presented at the beginning of the preceding period, regardless of whether the entity’s financial statements present comparative information for earlier periods. The entity presents three balance sheets:

• the end of the current period;
• the end of the preceding period; and
• the beginning of the preceding period.

An entity that is required to present a balance sheet at the beginning of the preceding period need not present the related notes to that balance sheet. This contrasts with the position where an entity chooses to present additional comparative information, in which case related notes are required.

Additional comparative information

An entity may present comparative information in addition to the minimum required under IAS 1.

Such additional information might include, For example:

• additional information that is presented voluntarily; or
• additional comparative information that is required by law or other regulations.

If additional comparative information is presented:

• the information must be prepared according to IFRS Standards;
• the information may consist of one or more of the statements referred to in IAS 1, but need not comprise a complete set of financial statements; and
• related note information should be presented for the additional statements.

IAS 1 cites as an example an entity that presents a third statement of profit or loss and other comprehensive income (i.e., it presents the statement for the current period, the preceding period, and one additional comparative period).

In such circumstances, the entity is not required to present a third statement of financial position, a third statement of cash flows, or a third statement of changes in equity.

However, the entity is required to present supporting notes for the additional statement of profit or loss and other comprehensive income.

Third statement of financial position required in specified circumstances

Circumstances when a third statement of financial position is required to be presented

In specified circumstances, an entity is required to present a third statement of financial position at the beginning of the preceding period in addition to the minimum comparative financial statements listed in IAS 1. This requirement applies when:

• an entity applies an accounting policy retrospectively, makes a retrospective restatement of items in its financial statements, or reclassifies items in its financial statements; and
• the retrospective application, retrospective restatement, or reclassification has a material effect on the information in the statement of financial position at the beginning of the preceding period.

Regardless of whether a third statement of financial position is required, an entity should provide the disclosures required under IAS 8 regarding the impact of changes in accounting policies and other restatements.

IAS 1 sets out specific requirements when an entity has reclassified comparative amounts.

‘Reclassification’ in the context of the requirement for a third statement of financial position

It appears that the phrase ‘reclassifies items in its financial statements’ in IAS 1 is intended to capture the types of ‘reclassifications’ described in IAS 1. In stating that the third statement of financial position is only required if it is materially affected by the reclassification, IAS 1 is clear that the following prospective event-driven reclassifications, for example, are not captured, because they do not affect the third statement of financial position:

• reclassification of an asset or a liability from non-current to current under IAS 1 because of the passage of time;
• for entities applying IFRS 9:

o reclassification of a financial asset required by IFRS 9 as a result of a change in an entity’s business model for managing financial                       assets; and

o reclassification of cumulative gains or losses on a debt instrument measured at fair value through other comprehensive income under               IFRS 9 from equity to profit or loss on disposal of the instrument;

• for entities that have not yet adopted IFRS 9:

o reclassification of a financial asset from the held-to-maturity to the available-for-sale category and vice versa; and

o reclassification of cumulative gains or losses on an available-for-sale financial asset from equity to profit or loss as a reclassification                  adjustment on impairment or disposal of the asset;

• classification of an operation as discontinued with reclassification of the comparative period statement of comprehensive income; and
• reclassification of a property from inventories to investment property on commencement of an operating lease to another party.

Application of the requirement for a third statement of financial position to regulatory filings

Application of the requirement for a third statement of financial position to regulatory filings – example

Entity A, with a calendar year-end, prepares its financial statements according to IFRS Standards. Entity A’s securities are listed on a regulated exchange which requires two statements of financial position and three statements of comprehensive income and cash flows to be presented in the financial statements.

Scenario 1

In its 20X8 financial statements, Entity A has not applied an accounting policy retrospectively or made a retrospective restatement or reclassification requiring the presentation of a third statement of financial position at the beginning of the preceding period (i.e., as of 1 January 20X7) under IAS 1.

As required by its regulator, Entity A presents statements of comprehensive income and cash flows for each of the years ending 31 December 20X8, 20X7, and 20X6.

Entity A is not required to present three statements of financial position. The third statement of comprehensive income and cash flows presented in respect of the earliest comparative period is supplementary information for regulatory purposes only. As clarified in IAS 1, Entity A is only required under IAS 1 to present one year of comparative information for its 20X8 statement of financial position.

Scenario 2

In its 20X9 financial statements, Entity A makes a retrospective restatement that materially affects the statement of financial position on 1 January 20X8. As a result, IAS 1 requires the presentation of an additional statement of financial position at the beginning of the preceding period (i.e., on 1 January 20X8).

For regulatory purposes, Entity A also presents the third statement of comprehensive income and cash flows for the year ending 31 December 20X7.

Entity A is not required to present a fourth statement of financial position on 1 January 20X7. As clarified by IAS 1, the additional statement of financial position is only required at the beginning of the preceding period (in this example, 20X8), not at the beginning of the earliest period presented (in this example, 20X7). It is acceptable for Entity A to present four statements of financial position if it chooses to do so, but this is not required.

Note: disclosures required to support a third statement of financial position

When an entity is required to present an additional statement of financial position as at the beginning of the preceding period by IAS 1, it need not present notes supporting that opening statement of financial position.

However, in the circumstances when an additional statement of position is required to be presented, the entity is required to disclose the information required by IAS 1 and also to comply with the relevant disclosure requirements of IAS 8.

Business combinations and additional balance sheet A pet food manufacturer acquired a competitor in December 20X0 and accounted for the business combination under IFRS 3 on a provisional basis in its 31 December 20X0 annual financial statements. The business combination accounting was finalised in 20X1 and the provisional fair values were updated. As a result, the 20X0 comparatives were adjusted in the 20X1 annual financial statements. Does the restatement require an opening balance sheet (that is, an additional balance sheet) as of 1 January 20X0? An additional statement of financial position is not required, because the acquisition had no impact on the entity’s financial position at 1 January 20X0.

First-time adopters should present full comparative notes for the third balance sheet required by IFRS 1.

An entity could choose to present a third statement of comprehensive income (presenting the current period, the preceding period, and one additional comparative period). The entity also presents the comparative notes related to that additional statement of comprehensive income but is not required to present a third balance sheet, a third cash flow statement, or a third statement of changes in equity.

Full notes are generally required for additional information that an entity provides voluntarily or provides in response to regulation or law.

When is it ‘impracticable’ to reclassify comparative amounts?

It might be impracticable for an entity to restate comparative figures when it changes the presentation or classification of items in its financial statements. The entity discloses the reason for not restating and the nature of the adjustments that would have been made if it had been practicable to do so.

It is ‘impracticable’ to apply a requirement if it cannot be applied after making every reasonable effort to do so. An entity does not reclassify where the data for the previous period has not been (and cannot be) collected in such a way as to permit reclassification.

Consistency of presentation

An entity retains the presentation and classification of items in the financial statements from one period to the next, unless:

1. it is apparent, following a significant change like the entity’s operations or a review of its financial statements, that another presentation or classification provides relevant and more reliable information; or
2. an IFRS requires a change in presentation.

An entity can only change its presentation if the new presentation is an improvement on the previous presentation. Entities should only change to a presentation that is likely to continue to be used in future periods so that comparability is not impaired.