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3 IAS 1 PRESENTATION OF FINANCIAL STATEMENT (SUMMARY)

SCOPE OBJECTIVE OVERALL CONSIDERATION COMPLETE SET OF FS

prepared in provide FAIR PRESENTATION AND SOFP

accordance information COMPLIANCE WITH IFRS CURRENT/
with ifrs about the NONCURRENT
financial TRUE AND FAIR VIEW OVER DISTINCTION
serve user to position, RIDE
make informed financial ASSETS (NCA/CA)
decision performance,
and cash flows GOING COCERN LIABILITIES(NCL/CL)
of an entity that
is useful to a ACCRUALS BASIS/MATCHING EQUTY
wide range of CONCEPT
users SOPL/SOCI
CONSISTENCY
PFT OR LOSS FOR THE PERIOD

OFFSETTTING INCOME (CAPITAL

INCOME/REVENUE INCOME)
COMPARATIVE INFORMATION
EXPENDITURE(CAPITAL
FREQUENCY OF REPORTING EXPENDITURE/REVENUE
EXPENDITURE)
CHANGES IN AP/ERRORS-
RETRSOPSECTIVE ADJ SOCI (NON OWNER MOV IN
EQ)
MATERIALITY AND IAS 16/38
AGGREGATION IAS 19
-CONTROVERSY ACCOUNTANTS IAS 21
VS AUDITORS IAS 39 CFH/IFRS 9
IFRS 9
PRACTICE STATEMENT 2
- RECLASSIFICATION ADJ

SOCE
OP ADJ FOR PYA +/_
CURRENT YEAR MOVEMENTS
(OWNER MOV IN EQUITY/
NON-OWNER MOV IN EQUITY
ADJ FOR EDA AND TRANSF TO
RE= CL BAL

SOCF -IAS 7

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NOTES TO FS / DISCLOSURE REQUIREMENT

Present information

- basis of preparation of FS

- the specific accounting policies used.

Present notes in a systematic manner/ shall consider the effect on the understandability and
comparability of its FS

Other disclosures, including:

(i) contingent liabilities (see IAS 37) and unrecognised contractual commitments; and
(ii) non-financial disclosures, eg the entity’s financial risk management objectives and policies (see
IFRS 7)

Disclosure of Accounting Policies

An entity shall disclose its significant accounting policies comprising:

(a) the measurement basis (or bases) used in preparing the financial statements; and
(b) the other accounting policies used that are relevant to an understanding of the financial
statements.

It is important for an entity to inform users of the measurement basis or bases used in the financial
statements (for example, historical cost, current cost, net realisable value, fair value or recoverable
amount) because the basis on which an entity prepares the financial statements significantly affects
users’ analysis.

An accounting policy may be significant because of the nature of the entity’s operations even if
amounts for current and prior periods are not material.

In the process of applying the entity’s accounting policies, management makes various judgements,
apart from those involving estimations, that can significantly affect the amounts it recognises in the
financial statements. For example, management makes judgements in determining:

(a) when substantially all the significant risks and rewards of ownership of financial assets and, for
lessors, assets subject to leases are transferred to other entities;
(b) whether, in substance, particular sales of goods are financing arrangements and therefore do
not give rise to revenue; and
(c) whether the contractual terms of a financial asset give rise on specified dates to cash flows
that are solely payments of principal and interest on the principal amount outstanding.

Sources of Estimation Uncertainty

An entity shall disclose information about the assumptions it makes about the future, and other
major sources of estimation uncertainty at the end of the reporting period, that have a significant
risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the
next financial year. In respect of those assets and liabilities, the notes shall include details of:

(a) their nature, and

(b) their carrying amount as at the end of the reporting period.

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INVESTOR PERSPECTIVE

Users of financial statements say that entities sometimes provide irrelevant information in
accounting policy disclosures or depict the information in a confusing way. This mainly arises
because entities are forced to adopt a checklist approach (read controversy between accountant vs
regulators) resulting in duplication of information and boiler plate information. Clutter in annual
reports is a problem, obscuring relevant information and making it more difficult for users to find the
key points about the performance of the business and its prospects for long-term success.

A significant cause of clutter in annual reports is the vast array of requirements imposed by laws,
regulations and financial reporting standards. Regulators and standard setters have a key role to play

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in cutting clutter both by cutting the requirements that they themselves already impose and by
guarding against the imposition of unnecessary new disclosures. A listed company may have to
comply with listing rules, company law, international financial reporting standards, the corporate
governance codes, and if it has an overseas listing, any local requirements, such as those of the
Securities and Exchange Commission (SEC) in the US

Shareholders are increasingly unhappy with the substantial increase in the length of reports that has
occurred in recent years. This has not resulted in more or better information, but more confusion as
to the reason for the disclosure. A review of companies’ published accounts will show that large
sections such as ‘Statement of Directors Responsibilities’ and ‘Audit Committee report’ are almost
identical.

Materiality should be seen as the driving force of disclosure, as its very definition is based on
whether an omission or misstatement could influence the decisions made by users of the financial
statements. The assessment of what is material can be highly judgmental and can vary from user to
user. A problem that seems to exist is that disclosures are being made because a disclosure checklist
suggests it may need to be made, without assessing whether the disclosure is necessary in a
company’s particular circumstances. However, it is inherent in these checklists that they include all
possible disclosures that could be material. Most users of these tools will be aware that the
disclosure requirements apply only to material items, but often this is not stated explicitly for users.

One of the most important challenges is in the changing audiences. From its origins in reporting to
shareholders, preparers now have to consider many other stakeholders including employees,
unions, environmentalists, suppliers, customers, etc. The disclosures required to meet the needs of
this wider audience have contributed to the increased volume of disclosure. The growth of previous
initiatives on going concern, sustainability, risk, the business model and others that have been
identified by regulators as ‘key’ has also expanded the annual report size. (CF 2018 AND PS 2 FOCUS
ON THE PRIMARY USER GROUPS- CIL)

The length of the annual report is not necessarily the problem but the way in which it is organised.
The inclusion of ‘immaterial’ disclosures will usually make this problem worse but, in a well
organised annual report, users will often be able to bypass much of the information they consider
unimportant, especially if the report is on line. It is not the length of the accounting policies
disclosure that is itself problematic, but the fact that new or amended policies can be obscured in a
long note running over several pages. A further problem is that accounting policy disclosure is often
‘boilerplate’, providing little specific detail of how companies apply their general policies to
particular transactions.

IFRS requires disclosure of ‘significant accounting policies’. In other words, IFRS does not require
disclosure of insignificant or immaterial accounting policies. Omissions in financial statements are
material only if they could, individually or collectively, influence the economic decisions that users
make. In many cases, it would not. Of far greater importance is the disclosure of the judgments
made in selecting the accounting policies, especially where a choice is available.

A reassessment of the whole model will take time and may necessitate changes to law and other
requirements. For example, unnecessary clutter could be removed by not requiring the disclosure of
IFRS in issue but not yet effective. The disclosure seems to involve listing each new standard in
existence and each amendment to a standard, including separately all those included in the annual

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improvements project, regardless of whether there is any impact on the entity. The note becomes a
list without any apparent relevance.

ADDITIONAL DISCLOSURE NOT REQUIRED BY STANDARD

IAS 1 requires disclosure of information not specifically required by IFRS Standards and not
presented elsewhere in the financial statements but that is relevant to an understanding of any of
the financial statements.

IAS 1, requires a company to consider whether any material information is missing from its financial
statements— i.e. a company is required to consider whether to provide additional disclosures
when compliance with the specific requirements in IFRS Standards is insufficient to enable
investors to understand the impact of particular transactions, other events and conditions on the
company’s financial position and financial performance.

Companies will therefore need to consider whether to provide additional disclosures when
compliance with the specific requirements in IFRS Standards is insufficient to enable investors to
understand the impact of climate-related matters on the company’s financial position and financial
performance. These overarching requirements in IAS 1 may be especially relevant for companies
whose financial position or financial performance is particularly affected by climate-related matters.

Sources of estimation uncertainty and significant judgements

If assumptions a company makes about the future have a significant risk of resulting in a material
adjustment to the carrying amounts of assets and liabilities within the next financial year, IAS 1
requires disclosure of information about those assumptions and the nature and carrying amount of
those assets and liabilities. This means disclosure of assumptions about climate-related matters may
be required, for example when those matters create uncertainties that affect assumptions used to
develop estimates, such as estimates of future cash flows when testing an asset for impairment or
the best estimate of expenditure required to settle a decommissioning obligation.

Companies must present that disclosure in a manner that helps investors understand the
judgements that management makes about the future. Although the nature and extent of the
information provided can vary, it might include for example the nature of the assumptions or the
sensitivity of carrying amounts to the methods, assumptions and estimates underlying their
calculation, including the reasons for the sensitivity.

IAS 1 also requires disclosure of the judgements (apart from those involving estimations) that
management has made that have the most significant effect on the amounts recognised in the
financial statements. For example, a company operating in an industry particularly affected by
climate-related matters might test an asset for impairment applying IAS 36 Impairment of Assets but
recognise no impairment loss. That company would be required to disclose judgements
management has made, for example, in identifying the asset’s cash-generating unit if such
judgements are among those that have the most significant effect on the amounts recognised in the
company’s financial statements.

Going concern

IAS 1 requires management to assess a company’s ability to continue as a going concern when
preparing financial statements. In assessing whether the going concern basis of preparation is
appropriate, management takes into account all available information about the future, which is at

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least, but is not limited to, 12 months from the end of the reporting period. If climate-related
matters create material uncertainties related to events or conditions that cast significant doubt upon
a company’s ability to continue as a going concern, IAS 1 requires disclosure of those uncertainties.
When management has concluded that there are no material uncertainties related to the going
concern assumption that require disclosure but reaching that conclusion involved significant
judgement (for example, about the feasibility and effectiveness of any planned mitigation), IAS 1
requires disclosure of that judgement.

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MATERIALITY

CF 2018 -OM IAS 1-OMO PS 2 MAKING MATERIALITY

JUDGEMENTS -OM

Information is Information is material if omitting, Information is material if omitting

material if its misstating or obscuring it could it or misstating it could influence
omission or reasonably be expected to influence decisions that users make on the
misstatement could decisions that the primary users of basis of financial information
about a specific reporting entity.
influence the general purpose financial
(SAME AS CF 2018)
economic decisions statements make on the basis of
of users taken on the those financial statements, which IAS 1 Presentation of Financial
basis of the financial provide financial information about Statements requires a company
statements. a specific reporting entity. to consider how primary users of
the company’s financial
The Conceptual Materiality is an entity-specific statements could reasonably be
Framework aspect of relevance, based on the expected to be influenced in
describes materiality size nature and/or magnitude of the making decisions.
as an application of items to which it relates in the
relevance by a context of the entity’s financial The general characteristics of
materiality shows that
particular entity. report.
When an entity is the need for materiality
assessing materiality, It is therefore difficult to specify a judgements is pervasive in the
preparation of financial
it is assessing uniform quantitative threshold for statements. A company makes
whether the materiality or predetermine what materiality judgements when
information is could be material in a particular making decisions about
relevant to the situation. presentation, disclosure,
readers of its own recognition and measurement.
financial statements. If an item is not material enough to Requirements in IFRS Standards
warrant separate disclosure on the need only be applied if their effect
face of the financial statements, it is material.
Assessment of an may still be material enough for
The Practice Statement also
item as material or separate disclosure in the notes. provides some general guidance
immaterial is very on identifying primary users and
subjective exercise their information needs. In
based on the value particular, it clarifies that:
of the item and its the primary users the company
context relative to should consider when making
the business. materiality judgements are
existing and potential investors,
lenders and other creditors, as
As such, information
identified by the Conceptual
relevant for one Framework.
entity might not be
financial statements do not, and
as relevant for
cannot, provide all the information
another entity. that primary users need. Hence, in
preparing its financial statements,
the company should aim to meet
the common information needs of
its primary users.

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IAS 1:
Each material class of similar items shall be presented separately in the financial statements.
Items of a dissimilar nature or function shall be presented separately unless they are immaterial.
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 on the face of the balance sheet, income statement, statement of changes in equity and cash
flow statement, or in the notes.

If a line item is not individually material, it is aggregated with other items either on the face of those
statements or in the notes. 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.

Materiality is an entity-specific aspect of relevance, based on the nature and/or magnitude of the
items to which it relates in the context of the entity’s financial report. It is therefore difficult to
specify a uniform quantitative threshold for materiality or predetermine what could be material in a
particular situation.

Materiality should ensure that relevant information is not omitted or mis-stated and it should help
filter out obscure information which is not useful to users of financial statements.

Information relevant for one entity might not be as relevant for another entity. IAS 1 Presentation
of Financial Statements says that an entity need not provide a specific disclosure required by an IFRS
if the information is not material and that the application of IFRSs, with additional disclosure when
necessary, is presumed to result in financial statements which achieve a fair presentation. In other
words, material information must be disclosed irrespective of whether there is an explicit disclosure
requirement.
Although preparers may understand the concept of materiality, they may be less certain about how
it should be applied. Preparers may be reluctant to filter out information which is not relevant to
users as auditors and regulators may challenge their reasons for the omissions. The way in which
some IFRSs are drafted suggests that their specific requirements override the general statement in
IAS 1 that an entity need not provide information which is not material.
Standards are often complied with rigidly which leads to ‘boiler plate’ disclosures. Regulators are not
keen to encourage the use of judgement but rather wish compliance with IFRS. If the concept of
materiality was applied successfully, then immaterial information would be removed and the
performance and the position of the entity would be more visible.
Investors require better, more relevant, material information. The time and resources available in a
reporting cycle may mean that many preparers are not capable or willing to make a materiality
judgement. Regulators are often unwilling to apply a principle-based view, and are often quick to
raise a query when a disclosure has been removed or not included.

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