International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards

by International GAAP 2019 (pdf)

  (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