The statement of financial position

Chapter 3 – Presentation of Financial Statements Page 40 There are very similar criteria for identifying a current liability, for example, the entity expects to settle the liability within its normal operating cycle, it holds the liability primarily for trading purposes, the liability is due to be settled within twelve months after the reporting period or the entity has no unconditional rights to defer payment for at least twelve months after the reporting period. [IAS 1.69] An entity is required to disclose amounts expected to be recovered or settled after more than twelve months for each asset and liability line item. [IAS 1.61] Illustration 1 An entity supplies seasoned timber to furniture manufacturers. The operating cycle is clearly defined and timber is matured over a three to five year period. The cost of the timber inventories would be classified as a current asset as they are realised within the normal operating cycle. The entity should disclose the amount of inventories to be realised more than twelve months after the reporting period, to assist users in assessing its liquidity and solvency.

4.4 The statement of changes in equity

The statement of changes in equity should include: [IAS 1.106]  total comprehensive income for the period, showing separately the amounts due to owners of the parent and to non-controlling interests;  for each component of equity the effect of any change in accounting policy or of any correction of errors;  for each component of equity a reconciliation of the carrying amount at the beginning and the end of the period, separately disclosing changes resulting from: o profit or loss; o each item of other comprehensive income; and o transactions with owners in their capacity as owners, showing separately contributions by them e.g. an issue of shares for cash and distributions to them e.g. dividends paid. In addition, information should be disclosed either in the statement of changes in equity or in the notes, in respect of the amount of dividends recognised in the period and the related amount per share. [IAS 1.107] An illustrative statement of changes in equity is included in the Guidance accompanying the standard.

4.5 The statement of cash flows

Cash flow information provides users of the financial statements with information to assess an entity’s ability to generate cash and how it utilises the cash in its operations. Requirements for the preparation of a statement of cash flows are set out in IAS 7 Statement of cash flows.

4.6 Notes

The notes provide additional relevant information to ensure that users fully understand the financial statements of an entity. Notes can be in a number of forms, for example narrative disclosures, disaggregation of information presented elsewhere in the financial statements or additional information which has not been presented elsewhere in the financial statements but Chapter 3 – Presentation of Financial Statements Page 41 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]