(c) provide additional disclosures when compliance with the specific requirements in
IFRS 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. [IAS 1.17].
However, the standard makes clear that inappropriate accounting policies are not
rectified either by disclosure of the accounting policies used or by notes or
explanatory material. [IAS 1.18]. As discussed at 4.1.1.B below, it is possible that an
extremely rare circumstance arises where departure from a provision of IFRS is
needed to achieve fair presentation. This is only allowed by IAS 1, however, if
permitted by such a regulatory framework.
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4.1.1.B
The fair presentation override
The presumption that the application of IFRS, with additional disclosure when
necessary, results in financial statements that achieve a fair presentation is a rebuttable
one, although the standard makes clear that in virtually all situations a fair presentation
is achieved through compliance.
The standard observes that an item of information would conflict with the objective of
financial statements when it does not represent faithfully the transactions, other events
and conditions that it either purports to represent or could reasonably be expected to
represent and, consequently, it would be likely to influence economic decisions made
by users of financial statements. When assessing whether complying with a specific
requirement in an IFRS would be so misleading that it would conflict with the objective
of financial statements, IAS 1 requires consideration of:
(a) why the objective of financial statements is not achieved in the particular
circumstances; and
(b) how the entity’s circumstances differ from those of other entities that comply with
the requirement. If other entities in similar circumstances comply with the
requirement, there is a rebuttable presumption that the entity’s compliance with
the requirement would not be so misleading that it would conflict with the
objective of financial statements. [IAS 1.24].
In the extremely rare circumstances in which management concludes that compliance
with a requirement in an IFRS would be so misleading that it would conflict with the
objective of financial statements, IAS 1 requires departure from that requirement.
However, this is only permitted if the ‘relevant regulatory framework requires, or
otherwise does not prohibit, such a departure’, which is discussed further below. [IAS 1.19].
When the relevant regulatory framework allows a departure, an entity should make it
and also disclose:
(a) that management has concluded that the financial statements present fairly the
entity’s financial position, financial performance and cash flows;
(b) that it has complied with applicable IFRSs, except that it has departed from a
particular requirement to achieve a fair presentation;
(c) the title of the IFRS from which the entity has departed, the nature of the
departure, including:
(i) the treatment that the IFRS would require;
(ii) the reason why that treatment would be so misleading in the circumstances
that it would conflict with the objective of financial statements set out in the
Framework; and
(iii) the treatment adopted;
(d) for each period presented, the financial impact of the departure on each item in
the financial statements that would have been reported in complying with the
requirement; and
(e) when there has been a departure from a requirement of an IFRS in a prior period,
and that departure affects the amounts recognised in the financial statements for
the current period, the disclosures set out in (c) and (d) above. [IAS 1.20-21].
Presentation of financial statements and accounting policies 149
Regarding (e) above, the standard explains that the requirement could apply, for example,
when an entity departed in a prior period from a requirement in an IFRS for the
measurement of assets or liabilities and that departure affects the measurement of changes
in assets and liabilities recognised in the current period’s financial statements. [IAS 1.22].
When the relevant regulatory framework does not allow a departure from IFRS, IAS 1
accepts that, notwithstanding the failure to achieve fair presentation, that it should not
be made. Although intended to occur only in extremely rare circumstances, this is a very
important provision of the standard as it allows a ‘relevant regulatory framework’ to
override the requirement of IFRS to achieve a fair presentation. In that light, it is
perhaps surprising that there is no definition or discussion in the standard of what a
relevant regulatory framework is.
When a departure otherwise required by IAS 1 is not allowed by the relevant regulatory
framework, the standard requires that the perceived misleading aspects of compliance
are reduced, to the maximum extent possible, by the disclosure of:
(a) the title of the IFRS in question, the nature of the requirement, and the reason why
management has concluded that complying with that requirement is so misleading
in the circumstances that it conflicts with the objective of financial statements set
out in the Framework; and
(b) for each period presented, the adjustments to each item in the financial statements that
management has concluded would be necessary to achieve a fair presentation. [IAS 1.23].
Overall, this strikes us as a fairly uncomfortable compromise. However, the rule is
reasonably clear and in our view such a circumstance will indeed be a rare one.
4.1.2 Going
concern
When preparing financial statements, IAS 1 requires management to make an assessment
of an entity’s ability to continue as a going concern. This term is not defined, but its meaning
is implicit in the requirement of the standard that financial statements should be prepared
on a going concern basis unless management either intends to liquidate the entity or to
cease trading, or has no realistic alternative but to do so. The standard goes on to require
that when management is aware, in making its assessment, of material uncertainties related
to events or conditions that may cast significant doubt upon the entity’s ability to continue
as a going concern, those uncertainties should be disclosed. Beyond requiring disclosure of
the uncertainties, the standard does not specify more precisely what information should
be disclosed. The Interpretations Committee recommended, in January 2013, that the IASB
make a narrow-scope amendment to IAS 1 that would address when these disclosures
should be made and what information should be disclosed. Although the IASB
acknowledged that more prescriptive requirements would lead to useful information to
investors and creditors, it also had the expectation that such requirements may result in
‘boilerplate’ disclosures that would obscure relevant disclosures about going concern and
thus would contribute to disclosure overload. It also observed that this is a topic that is
better handled through local regulator or audit guidance.1
When financial statements are not pre
pared on a going concern basis, that fact should
be disclosed, together with the basis on which the financial statements are prepared and
the reason why the entity is not regarded as a going concern. [IAS 1.25].
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In assessing whether the going concern assumption is appropriate, the standard requires
that all available information about the future, which is at least, but is not limited to,
twelve months from the end of the reporting period should be taken into account. The
degree of consideration required will depend 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. [IAS 1.26].
There is no guidance in the standard concerning what impact there should be on the
financial statements if it is determined that the going concern basis is not appropriate.
Accordingly, entities will need to consider carefully their individual circumstances to
arrive at an appropriate basis.
4.1.3
The accrual basis of accounting
IAS 1 requires that financial statements be prepared, except for cash flow information,
using the accrual basis of accounting. [IAS 1.27]. No definition of this is given by the
standard, but an explanation is presented that ‘When the accrual basis of accounting is
used, items are recognised as assets, liabilities, equity, income and expenses (the
elements of financial statements) when they satisfy the definitions and recognition
criteria for those elements in the Conceptual Framework.’ [IAS 1.28].
The Conceptual Framework explains the accruals basis as follows. ‘Accrual accounting
depicts the effects of transactions and other events and circumstances on a reporting
entity’s economic resources and claims in the periods in which those effects occur, even
if the resulting cash receipts and payments occur in a different period. This is important
because information about a reporting entity’s economic resources and claims and
changes in its economic resources and claims during a period provides a better basis for
assessing the entity’s past and future performance than information solely about cash
receipts and payments during that period.’ [CF 1.17].
The requirements of the Conceptual Framework are discussed in more detail in
Chapter 2.
4.1.4 Consistency
As noted at 1.1 and 1.2 above, one of the objectives of both IAS 1 and IAS 8 is to ensure
the comparability of financial statements with those of previous periods. To this end,
each standard addresses the principle of consistency.
IAS 1 requires that the ‘presentation and classification’ of items in the financial
statements be retained from one period to the next unless:
(a) it is apparent, following a significant change in the nature of the entity’s operations
or a review of its financial statements, that another presentation or classification
would be more appropriate having regard to the criteria for the selection and
application of accounting policies in IAS 8 (see 4.3 below); or
(b) an IFRS requires a change in presentation. [IAS 1.45].
Presentation of financial statements and accounting policies 151
The standard goes on to amplify this by explaining that a significant acquisition or
disposal, or a review of the presentation of the financial statements, might suggest that
the financial statements need to be presented differently. An entity should change the
presentation of its financial statements only if the changed presentation provides
information that is reliable and is more relevant to users of the financial statements and
the revised structure is likely to continue, so that comparability is not impaired. When
making such changes in presentation, an entity will need to reclassify its comparative
information as discussed at 2.4 above. [IAS 1.46].
IAS 8 addresses consistency of accounting policies and observes that users of financial
statements need to be able to compare the financial statements of an entity over time to
identify trends in its financial position, financial performance and cash flows. For this
reason, the same accounting policies need to be applied within each period and from
one period to the next unless a change in accounting policy meets certain criteria
(changes in accounting policy are discussed at 4.4 below). [IAS 8.15]. Accordingly, the
standard requires that accounting policies be selected and applied consistently for
similar transactions, other events and conditions, unless an IFRS specifically requires or
permits categorisation of items for which different policies may be appropriate. If an
IFRS requires or permits such categorisation, an appropriate accounting policy should
be selected and applied consistently to each category. [IAS 8.13].
4.1.5
Materiality, aggregation and offset
4.1.5.A
Materiality and aggregation
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 the process of aggregation and classification is the presentation of condensed
and classified data, which form line items in the financial statements, or in the notes.
[IAS 1.30]. The extent of aggregation versus detailed analysis is clearly a judgemental one,
with either extreme eroding the usefulness of the information.
IAS 1 resolves this issue with the concept of materiality, by requiring:
• each material class of similar items to be presented separately in the financial
statements; and
• items of a dissimilar nature or function to be presented separately unless they are
immaterial. [IAS 1.29].
The standard also states when applying IAS 1 and other IFRSs an entity should decide,
taking into consideration all relevant facts and circumstances, how it aggregates
information in the financial statements, which include the notes. In particular, the
understandability of financial statements should not be reduced by obscuring material
information with immaterial information or by aggregating material items that have
different natures or functions. [IAS 1.30A].
Materiality is defined by both IAS 1 and IAS 8 as follows. ‘Omissions or misstatements
of items are material if they could, individually or collectively, influence the economic
decisions that users make on the basis of the financial statements. Materiality depends
on the size and nature of the omission or misstatement judged in the surrounding
circumstances. The size or nature of the item, or a combination of both, could be the
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determining factor.’ [IAS 1.7, IAS 8.5]. As discussed at 6.2.5 below, the Board is in the
process of changing this definition to align with the new Conceptual Framework
(discussed in Chapter 2).
At a general level, applying the concept of material
ity means that a specific disclosure
required by an IFRS to be given in the financial statements (including the notes) need
not be provided if the information resulting from that disclosure is not material. This is
the case even if the IFRS contains a list of specific requirements or describes them as
minimum requirements. On the other hand, the provision of additional disclosures
should be considered when compliance with the specific requirements in IFRS is
insufficient to enable users of financial statements to understand the impact of particular
transactions, other events and conditions on the entity’s financial position and financial
performance. [IAS 1.31].
IAS 1 and IAS 8 go on to observe that assessing whether an omission or misstatement
could influence economic decisions of users, and so be material, requires consideration
of the characteristics of those users. For these purposes users are assumed to have a
reasonable knowledge of business and economic activities and accounting and a
willingness to study the information with reasonable diligence. Therefore, the
assessment of materiality needs to take into account how users with such attributes
could reasonably be expected to be influenced in making economic decisions.
[IAS 1.7, IAS 8.6].
Regarding the presentation of financial statements, IAS 1 requires that if a line item is
not individually material, it should be aggregated with other items either on the face of
those statements or in the notes. The standard also states that an item that is not
sufficiently material to warrant separate presentation on the face of those statements
may nevertheless be sufficiently material for it to be presented separately in the notes.
[IAS 1.30].
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.
4.1.5.B Offset
IAS 1 considers it important that assets and liabilities, and income and expenses, are
reported separately. This is because offsetting in the statement of profit or loss or
statement of comprehensive income or the statement of financial position, except when
offsetting reflects the substance of the transaction or other event, detracts from the
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 31
