International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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Presentation of financial statements and accounting policies 143
(c) disposals of items of property, plant and equipment;
(d) disposals
of investments;
(e) discontinued
operations;
(f) litigation settlements; and
(g) other reversals of provisions. [IAS 1.98].
This information may be given on the face of the statement of profit or loss, on the face
of the statement of comprehensive income or in the notes. In line with the permissive
approach taken to the format of the performance statements discussed above, the level
of prominence given to such items is left to the judgement of the entity concerned.
However, regarding (e) above, IFRS 5 requires certain information to be presented on
the face of the statement of profit or loss (see Chapter 4 at 3.2).
3.2.6.B Ordinary
activities and extraordinary items
IAS 1 states that an entity ‘shall not present any items of income or expense as
extraordinary items, in the statement(s) presenting profit or loss and other
comprehensive income, or in the notes.’ [IAS 1.87].
This derives from the fact that earlier versions of the standard required a distinction to
be made between ordinary activities (and the results of them) and extraordinary items.
The basis for conclusions to IAS 1 explains that the removal of this distinction, and the
prohibition on the presentation of extraordinary items, was made to avoid arbitrary
segregation of an entity’s performance. [IAS 1.BC64].
3.3
The statement of changes in equity
IAS 1 requires the presentation of a statement of changes in equity showing: [IAS 1.106]
(a) total comprehensive income for the period (comprising profit and loss and other
comprehensive income – see 3.2.1 above) showing separately the total amounts
attributable to owner of the parent and to non-controlling interests;
(b) for each component of equity, the effects of retrospective application or retrospective
restatement recognised in accordance with IAS 8 (discussed at 4.4 and 4.6 below); and
(c) for each component of equity, a reconciliation between the carrying amount at the
beginning and the end of the period, separately disclosing changes resulting from:
(i) profit
or
loss;
(ii) other comprehensive income; and
(iii) transactions with owners in their capacity as owners, showing separately
contributions by and distributions to owners and changes in ownership
interests in subsidiaries that do not result in a loss of control.
The reconciliation in (c)(ii) above must show each item of other comprehensive income,
although that detail may be shown in the notes. [IAS 1.106A].
The amounts of dividends shown as distributions to owners and the amounts of dividends
per share should be shown either on the face of the statement or in the notes. [IAS 1.107].
It can be seen that (a) above is effectively a sub-total of all the items required by (c)(i)
and (c)(ii).
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For these purposes, ‘components’ of equity include each class of contributed equity, the
accumulated balance of each class of other comprehensive income and retained
earnings. [IAS 1.108].
This analysis reflects the focus of the IASB on the statement of financial position –
whereby any changes in net assets (aside of those arising from transactions with owners)
are gains and losses, regarded as performance. In this vein, IAS 1 observes that changes in
an entity’s equity between two reporting dates reflect the increase or decrease in its net
assets during the period. Except for changes resulting from transactions with owners acting
in their capacity as owners (such as equity contributions, reacquisitions of the entity’s own
equity instruments and dividends) and transaction costs directly related to such
transactions, the overall change in equity during a period represents the total amount of
income and expenses, including gains and losses, generated by the entity’s activities during
that period. [IAS 1.109].After taking account of total gains and losses and owner transactions
in this way, any other changes in equity will result from the restatement of prior periods.
Point (b) above reflects this. IAS 8 requires retrospective adjustments to effect changes in
accounting policies, to the extent practicable, except when the transitional provisions in
another IFRS require otherwise. IAS 8 also requires that restatements to correct errors are
made retrospectively, to the extent practicable. These are discussed at 4 below. IAS 1
observes that retrospective adjustments and retrospective restatements ‘are not changes in
equity but they are adjustments to the opening balance of retained earnings, except when
an IFRS requires retrospective adjustment of another component of equity.’ Point (b)
above therefore requires disclosure in the statement of changes in equity of the total
adjustment to each component of equity resulting, separately, from changes in accounting
policies and from corrections of errors. These adjustments should be disclosed for each
prior period and the beginning of the period. [IAS 1.110].
The illustrative statement from the implementation guidance accompanying IAS 1 is set
out below. [IAS 1 IG Part I].
Example 3.9:
Combined statement of all changes in equity
XYZ Group – Statement of changes in equity for the year ended 31 December 2019
(in thousands of currency units)
Share Retained
Trans- Investments Cash flow
Re-
Total
Non-
Total
capital earnings
lation of
in equity
hedge valuation
controlling
equity
foreign instruments
surplus
interest
operations
Balance at
1 January 2018
600,000 118,100 (4,000)
1,600
2,000
–
717,700 29,800
747,500
Changes in
accounting policy
–
400
–
–
–
–
400 100
500
Restated balance 600,000
118,500
(4,000)
1,600
2,000
–
718,100 29,900
748,000
Changes in equity
for 2018
Dividends –
(10,000)
–
–
–
–
(10,000) –
(10,000)
Total comprehensive
income for the year(1)
– 53,200
6,400
16,000
(2,400)
1,600
74,800 18,700 93,500
Balance at
31 December 2018
600,000 161,700
2,400
17,600
(400)
1,600
782,900
48,600 831,500
Presentation of financial statements and accounting policies 145
Changes in equity
Share Retained
Trans- Investments Cash flow
Re-
Total
Non-
Total
for 2019
capital earnings lation of
in equity
hedge valuation
controlling
equity
foreign instruments
surplus
interest
operations
Issue of share
capital
50,000
–
–
–
–
–
50,000 –
50,000
Dividends –
(15,000)
–
–
–
–
(15,000) –
(15,000)
Total
comprehensive
income for the
year(2) –
96,600
3,200
(14,400)
(400)
800
85,800
21,450
107,250
Transfer to retained
earnings –
200
–
–
–
(200)
– –
–
Balance at
31 December 2019
650,000 243,500
5,600
3,200
(800)
2,200
903,700
70,050 973,750
(1)
The amount included in retained earnings for 2018 of 53,200 represents profit attributable to owners of the parent of 52,400
plus remeasurements of defined benefit pension plans of 800 (1,333, less tax 333, less non-controlling interest 200).
The amount included in the translation, investments in equity instruments and cash flow hedge reserves represent other
comprehensive income for each component, net of tax and non-controlling interest, e.g. other comprehensive income related to investments in equity instruments for 2019 of 16,000 is 26,667, less tax 6,667, less non-controlling interest 4,000.
The amount included in the revaluation surplus of 1,600 represents the share of other comprehensive income of associates
of (700) plus gains on property revaluation of 2,300 (3,367, less tax 667, less non-controlling interest 400). Other
comprehensive income of associates relates solely to gains or losses on property revaluation.
(2)
The amount included in retained earnings of 2019 of 96,600 represents profit attributable to owners of the parent of 97,000
less remeasurements of defined benefit pension plans of 400 (667, less tax 167, less non-controlling interest 100).
The amount included in the translation, investments in equity instruments and cash flow hedge reserves represent other
comprehensive income for each component, net of tax and non-controlling interest, e.g. other comprehensive income related to the translation of foreign operations for 2019 of 3,200 is 5,334, less tax 1,334, less non-controlling interest 800.
The amount included in the revaluation surplus of 800 represents the share of other comprehensive income of associates of 400 plus gains on property revaluation of 400 (933, less tax 333, less non-controlling interest 200). Other comprehensive income of associates relates solely to gains or losses on property revaluation.
3.4
The notes to the financial statements
IAS 1 requires the presentation of notes to the financial statements that:
(a) present information about the basis of preparation of the financial statements and
the specific accounting policies used (see 5.1 below);
(b) disclose the information required by IFRS that is not presented elsewhere in the
financial statements; and
(c) provide additional information that is not presented elsewhere in the financial
statements, but is relevant to an understanding of any of them. [IAS 1.112].
The notes should, as far as practicable, be presented in a systematic manner, determined
in consideration of its effect on the understandability and comparability of the financial
statements. Each item on the face of the primary statements should be cross-referenced
to any related information in the notes. [IAS 1.113].
There is, perhaps, a trade-off to be made between understandability and comparability,
in that allowing entities to structure their notes to, for instance, reflect their business
model or perceived importance may reduce the comparability between one entity and
another. The standard does not prescribe a specific order, but in the Basis for Conclusions
the consistency dimension of comparability is highlighted, and it is clarified that the
ordering of the notes generally is not expected to be changed frequently. [IAS 1.BC76D].
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Examples given in the standard of the systematic ordering or grouping of the notes are
as follows:
(a) giving prominence to the areas of its activities that the entity considers to be most
relevant to an understanding of its financial performance and financial position,
such as grouping together information about particular operating activities;
(b) grouping together information about items measured similarly such as assets
measured at fair value; or
(c) following the order of the line items in the statement(s) of profit or loss and other
comprehensive income and the statement of financial position, such as:
(i) a statement of compliance with IFRS (see 2.5.2 above);
(ii) significant accounting policies applied (see 5.1.1 below);
(iii) supporting information for items presented on the face of the primary statements,
in the order in which each statement and each line item is presented; and
(iv) other disclosures, including: contingent liabilities, unrecognised contractual
commitments
and non-financial disclosures such as financial risk
management objectives and policies. [IAS 1.114].
The standard also allows that notes providing information about the basis of preparation
of the financial statements and specific accounting policies may be presented as a
separate section of the financial statements. [IAS 1.116].
4 ACCOUNTING
POLICIES
The selection and application of accounting policies is obviously crucial in the
preparation of financial statements. As a general premise, the whole purpose of
accounting standards is to specify required accounting policies, presentation and
disclosure. However, judgement will always remain; many standards may allow choices
to accommodate different views, and no body of accounting literature could hope to
prescribe precise treatments for all possible situations.
In the broadest sense, accounting policies are discussed by both IAS 1 and IAS 8. Whilst,
as its title suggests, IAS 8 deals explicitly with accounting policies, IAS 1 deals with what
one might describe as overarching or general principles.
4.1 General
principles
IAS 1 deals with some general principles relating to accounting policies, with IAS 8 discussing
the detail of selection and application of individual accounting policies and their disclosure.
The general principles discussed by IAS 1 can be described as follows:
• fair presentation and compliance with accounting standards;
• going concern;
• the accrual basis of accounting;
• consistency;
• materiality and aggregation;
�
� offsetting; and
• profit or loss for the period.
Presentation of financial statements and accounting policies 147
These are discussed in 4.1.1-4.1.6 below.
In September 2017 the IASB published Practice Statement 2 – Making Materiality
Judgements. This is a non-mandatory statement and does not form part of IFRS. An
overview of its contents is given at 4.1.7 below.
4.1.1 Fair
presentation
4.1.1.A
Fair presentation and compliance with IFRS
Consistent with its objective and statement of the purpose of financial statements,
IAS 1 requires that financial statements present fairly the financial position,
financial performance and cash flows of an entity. Fair presentation for these
purposes requires the faithful representation of the effects of transactions, other
events and conditions in accordance with the definitions and recognition criteria
for assets, liabilities, income and expenses set out in the Conceptual Framework
(discussed in Chapter 2).
The main premise of the standard is that application of IFRS, with additional disclosure
when necessary, is presumed to result in financial statements that achieve a fair
presentation. [IAS 1.15]. As noted at 1.1 above, an important point here is that
implementation guidance for standards issued by the IASB does not form part of those
standards (unless they are explicitly ‘scoped-in’), and therefore does not contain
requirements for financial statements. [IAS 8.8]. In contrast, any application guidance
appended to a standard forms an integral part of that standard.
Accordingly, the often voluminous implementation guidance accompanying standards
is not, strictly speaking, part of IFRS. We would generally be surprised, though, at
entities not following such guidance. The presumption that application of IFRS (with
any necessary additional disclosure) results in a fair presentation is potentially
rebuttable, as discussed at 4.1.1.B below.
A fair presentation also requires an entity to:
(a) select and apply accounting policies in accordance with IAS 8, which also sets out
a hierarchy of authoritative guidance that should be considered in the absence of
an IFRS that specifically applies to an item (see 4.3 below);
(b) present information, including accounting policies, in a manner that provides
relevant, reliable, comparable and understandable information; and