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is relevant to the understanding of any of them. [IAS 1.112] The notes should present information about the basis of preparation of the financial
statements and set out the specific accounting policies followed and judgements made by management in applying them. In addition, information should be provided on the key
assumptions made by management concerning the future and the uncertainty of estimates that have been made, which may lead to significant adjustments having to be made in the
next financial year. In such circumstances information should be provided on the nature of these items and their carrying amount at the end of the reporting period. The notes should be
presented in a systematic order, for example following the order in which items are presented elsewhere in the financial statements, and there should be full cross referencing between the
individual statements and the notes.
Specific information should be included in the notes about the overall entity, for example the country of incorporation, domicile, the legal form of the entity and its registered address. A
description of the nature of the entity’s operations and its principal activities along with the name of its parent and, where appropriate, the ultimate parent of the group should be
provided. Information should also be provided on dividends that were proposed or declared before the financial statements were authorised for issue but have not been recognised as a
distribution in the period, with disclosure of the related amount per share and the amount of any cumulative preference dividend not recognised. [IAS 1.137, 1.138]
5 Overall Considerations
Much of the material covered in the rest of this chapter on IAS 1 details the specific application within financial statements of the general principles dealt with in the IASB
Framework.
5.1 Fair presentation and compliance with IFRS
IAS 1 requires that the financial statements should present fairly the financial position, financial performance and cash flows of the entity.
Fair presentation is defined as representing faithfully the effects of transactions, other events, and conditions in accordance with the definitions and recognition criteria in the IASB
Framework. Under IAS 1 application of international standards along with any relevant interpretations and disclosures is presumed to result in a fair presentation. [IAS 1.15]
To achieve fair presentation in a set of financial statements an entity should also select and apply the most appropriate accounting policies in accordance with IAS 8 Accounting policies,
changes in accounting estimates and errors. An entity cannot simply rectify the inappropriate use of accounting policies through disclosure. [IAS 1.18]
If a set of financial statements complies with International Financial Reporting Standards IFRS, then those financial statements should include an explicit and unreserved statement
to that effect. Such disclosure can only be made when the financial statements comply with all IFRS requirements; management is not permitted to cherry pick requirements. [IAS 1.16]
IAS 1 sets out procedures to be followed when management concludes that compliance with an IFRS would be so misleading as to conflict with the objectives of the financial statements
as set out in the IASB Framework. It is thought that in practice such circumstances are likely to be extremely rare. If, however, such circumstances did exist, then management should
depart from the particular requirement, provided that to do so would not be inconsistent with the regulatory framework in which the entity operates. If there has been a departure from an
international standard, then this should be fully explained, setting out the circumstances that led to the departure, quantifying the effect on all periods reported and stating specifically what
the departure is. Disclosure is also required if a departure arose in the previous period but still affects the financial statements of the current period. [IAS 1.19 – 21]
Chapter 3 – Presentation of Financial Statements Page 42
5.2 Offsetting
Assets and liabilities should not be offset against each other unless this is specifically required or permitted by a standard. This is because the offsetting or netting of items is
assumed to make it more difficult for the users of financial statements to understand past transactions and assess future cash flows. [IAS 1.32]
5.3 Other considerations
In order for financial statements to be comparable, certain overall considerations need to be followed in the preparation of the financial statements, as set out below.
5.3.1 Going concern
When preparing a set of financial statements management should assume, unless there are specific reasons to believe otherwise, that the business will continue to operate for the
foreseeable future. This is known as the going concern concept. This is particularly relevant when management make estimates about the expected outcome of events, such as the
recoverability of trade receivables and the useful lives of non-current assets. [IAS 1.25]
5.3.2 Accrual concept
Financial statements should be prepared by applying the accrual concept. In its simplest form the accrual concept means that assets are recognised when they are receivable rather than
when physically received, and liabilities are recognised when they are payable rather than when actually paid. This is not relevant for the preparation of the statement of cash flows
which is based purely on cash flows. [IAS 1.27]
5.3.3 Consistency of presentation
To aid comparability of financial statements year on year and across different entities it is important that a consistent presentation and classification of items is followed. The
presentation should only be changed where a new or revised standard requires such a change or where there has been a significant change in the nature of the entity’s operations
and a new presentation would therefore be more appropriate. [IAS 1.45]
5.3.4 Materiality and aggregation
IAS 1 requires that items that are of importance to the users of the financial statements in making economic decisions should be separately identified within the financial statements.
Such items are defined as being “material”. In assessing whether items are considered to be material, the entity should consider both the nature and size of the item. For example, the
purchase of large tangible assets may be common for a particular entity, and therefore it would generally be appropriate to aggregate such items together as the purchase of plant.
However, a fairly small transaction with a director may be considered as important information for users of the financial statements. [IAS 1.7, 1.29]
5.3.5 Comparative information
Comparative information for the previous period should be disclosed for all amounts reported in the financial statements unless a particular standard does not require such information.
This includes the requirement to show comparative information in narrative disclosures where it is relevant to the full understanding of the explanation. [IAS 1.38]
If adjustments to prior periods have been made as a result of a change in accounting policy or of correction of errors, a statement of financial condition at the beginning of the previous
period should be presented. [IAS 1.10]
