Let’s break down IAS 1 (Presentation of Financial Statements)
into its key parts in a simple, easy-to-understand way. This standard explains
how financial statements should look (form) and what they should include (content).
{getToc} $title={Components of IAS 1}
1. What is IAS 1?
IAS 1 tells companies how to prepare and present their financial statements. The goal is to ensure the financial information is clear, consistent, and useful for people who need to understand a company’s performance, like investors, creditors, government, and the public.
2. What Should Financial Statements Include?
According to IAS 1, a complete set of financial statements must include:
i. Statement of Financial Position (also called the Balance Sheet):
This shows what the company owns (assets), what it owes (liabilities), and the owners' share (equity) at a specific point in time.
ii. Statement of Profit or Loss and Other Comprehensive Income:
This shows how much money the company made (revenue) and spent (expenses) during a period, and whether it ended up with a profit or a loss. Other comprehensive income includes things like foreign currency gains/losses that are not part of the company’s regular business but affect the company's financials, nonetheless.
iii. Statement of Changes in Equity:
This shows how the owners' share in the company has changed over time due to profits, losses, or any other adjustments.
iv. Statement of Cash Flows:
This shows the flow of cash in and out of the business. The flow of cash is typically as a result of operating activities (day-to-day business), investing activities (buying/selling assets), and financing activities (borrowing or repaying money).
v. Notes to the Financial Statements:
These provide additional details about the amounts in the financial statements. They include accounting policies, explanations, and extra breakdowns of key information.
3. General Rules to Follow
IAS 1 gives several rules that companies need to follow when preparing financial statements:
a. Fair Presentation:
The financial statements should reflect the true financial position and performance of the company. If the statements follow all the rules, they should be fair and reliable.
b. Going Concern:
Financial statements should be prepared on the assumption that the company will continue to operate in the future unless there’s evidence that it won’t. If a company is expected to shut down, they must disclose that. In this case, the financial statements is prepared using the breakup basis and not accrual basis as described below.
c. Accrual Basis of Accounting:
Transactions should be recorded in the financial statements when they occur, not just when cash is received or paid. For example, if a company delivers a service in December but gets paid in January, they should record the income in December.
Note that only the Statement of Cashflows should be prepared using the cash basis and not accrual basis. The statement of cash flow has a separate standard that governs it (I.e., IAS7)
d. Consistency:
The way the company presents information (how things are classified, etc.) should stay the same from year to year to avoid confusion while comparing its financial statements for different years. Changes can only be made if they lead to better financial reporting or are required by new reporting standards.
e. Materiality:
Only important (or material) information needs to be separately shown. Small, insignificant items can be grouped together.
For example, a company that sells imported cars may group expenses for office supplies (pens, papers, staplers, etc.), and minor repair cost (like cost of fixing an office furniture, etc.) under "miscellaneous expenses" in its financial statements, because they are tiny and insignificant compared to the kind of expenses incurred by the company while performing its regular business of selling imported cars.
4. Current vs. Non-Current Classification
IAS 1 requires companies to divide assets and liabilities into current and non-current categories:
· Current Assets:
These are items that the company own that is expected to be used up or turned into cash within 12 months.
Examples include cash, inventory (goods the company is holding to sell), and accounts receivable (money owed to the company by customers who have bought goods or services on credit).
· Current Liabilities:
These are items that the company owe that is expected to be settled within 12 months.
Examples include short term loans, accounts payable (money the company owes suppliers for goods or services it purchased on credit), etc.
· Non-Current Assets:
These are resources that are expected to provide value to the company for more than 12 months.
Examples include property, Plant and Equipment (PPE), long-term investments etc.
· Non-Current Liabilities:
These are obligations that are due beyond 12 months.
Examples include long-term debts, deferred tax liabilities (taxes that are payable in the future), etc.
You’d note that the above items are items usually found in the balance sheet.
Also, note that a company’s balance sheet must always satisfy the basic accounting equation: Assets = Liabilities + Equity
See below screenshots of Schneider Electric Company's balance sheet, downloaded from the company's website to see how it plays out.
5. Profit or Loss vs. Other Comprehensive Income (OCI):
Companies often divide their financial performance into two parts:
6. Notes to the Financial Statements:
The Notes are crucial because they provide extra detail and explanation about the numbers in the financial statements. They often include:
a. Accounting policies (how the company applies the rules)
b. Detailed breakdowns of revenue, expenses, assets, and liabilities
c. Information about risks and uncertainties the company might face
7. Comparative Information
IAS 1 says companies must present comparative information from the previous period. This helps users compare performance year-to-year. So, if you’re looking at a company’s financial statements for 2023, it should also show figures from 2022 for comparison.
You may refer to Schneider Electric Company’s financial statements above showing comparative figures for 2022 and 2023 financial years.
8. Offsetting
Generally, assets and liabilities, or income and expenses, should not be offset or combined unless specifically allowed by another IFRS standard. This helps ensure transparency. For example, companies shouldn’t offset a loan with the bank balance unless allowed, as it might hide important information.
Quick Recap:
· IAS 1 is about how financial statements are presented.
· Financial statements must include five key reports: balance sheet, income statement, cash flow, changes in equity, and notes.
· The financial statements should reflect the true financial position and follow rules like fair presentation, going concern, and consistency.
· Assets and liabilities should be classified as current or non-current.
· Profit or loss focuses on regular business, while other comprehensive income covers less regular items.
· Notes to
the financial statements explain important details and accounting policies.