Objectives, Scope and Definitions of IAS 1

Objectives, Scope and Definitions of IAS 1

The purpose of financial statements is to provide information about financial position, financial performance and cash flows.

The objective of IAS 1 is to set out the basis for the presentation of financial statements and to ensure comparability with previous periods and with other entities. The standard identifies a minimum content of what should be included in a set of financial statements as well as guidelines as to their structure, although rigid formats are not prescribed.

Scope:

IAS 1 applies to all general purpose financial statements prepared and presented in

accordance with international standards. [IAS 1.2]

“General purpose” financial statements are statements that have been prepared for use by those who are not in a position to require an entity to prepare reports tailored to their own information needs.

 Reports prepared at the request of an entity’s management or bankers are not general purpose financial statements, because they are prepared specifically to meet the needs of management/bankers.

The Complete Set of Financial Statements

Statement of financial position	Statement of comprehensive income	Statement of changes in equity	Statement of cash flows	Notes
Assets, liabilities & equity	Income (including gains) and expenses (including losses)	All changes in equity	Summary of major cash inflows and outflows dealt with in IAS 7	Significant accounting policies and other explanatory notes

Reporting period

It is normal for entities to present financial statements annually and IAS 1 states that they should be prepared at least as often as this. If (unusually) the end of an entity's reporting period is changed, for whatever reason, the period for which the statements are presented will be less or more than one year. In such cases the entity should also disclose:

(a) The reason(s) why a period other than one year is used

(b) The fact that the comparative figures given are not in fact comparable

For practical purposes, some entities prefer to use a period which approximates to a year, eg 52 weeks, and the IAS allows this approach as it will produce statements not materially different from those produced on an annual basis.

Timeliness

If the publication of financial statements is delayed too long after the reporting period, their usefulness will be severely diminished. An entity with consistently complex operations cannot use this as a reason for its failure to report on a timely basis. Local legislation and market regulation imposes specific deadlines on certain entities.

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]

 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]

 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.

 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]

 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

 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]

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]

 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]

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, judgments that have been made in applying an entity’s accounting policies, and assumptions that an entity has made over the uncertainty of making estimations.