Currentnon-current distinction PRESENTATION OF FINANCIAL STATEMENTS

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] Chapter 3 – Presentation of Financial Statements Page 43

5.3.6 Additional disclosures

A number of additional disclosures are required by IAS 1 to ensure that users of the financial statements understand the basis on which the information presented in the financial statements has been prepared. These additional disclosures which should be presented include: the measurement basis used in the preparation of the financial statements, judgements that have been made in applying an entity’s accounting policies, and assumptions that an entity has made over the uncertainty of making estimations. [IAS 1.117, 1.122, 1.125] 6 Chapter Review This chapter has been concerned with the presentation of financial statements and has covered:  IAS 1s objective, scope, definitions and disclosure requirements;  what makes up a complete set of the financial statements;  the content of each element within the financial statements; and  the overall considerations that need to be addressed in preparing a set of financial statements.