Accounting Science

Presentation of Financial Statements According to IAS 1 Standard

Posted by

mariam elghandour

On February 17, 2025

Comments Off

AS 1 Standard, “Presentation of Financial Statements,” is the cornerstone of International Financial Reporting Standards (IFRS), as it specifies how to present an entity’s financial information clearly, understandably, and reliably. IAS 1 Standard provides a general framework for the presentation of financial statements, including their structure and minimum content requirements, in addition to the general principles of recognition and measurement. In this article, we will explain IAS 1 Standard in detail, discuss its objectives, scope, and key requirements, focusing on the components of a complete set of financial statements, fair presentation principles, and disclosure requirements, in addition to highlighting the importance of this standard and its impact on the quality of financial reporting.

What is IAS 1 Standard: Presentation of Financial Statements?

IAS 1 Standard is an international accounting standard that specifies how to present general-purpose financial statements to ensure comparability both with the entity’s financial statements of previous periods and with the financial statements of other entities. IAS 1 Standard sets out overall requirements for the presentation of financial statements, guidelines for their structure, and minimum requirements for their content.

Objective of IAS 1 Standard:

Specifying the Basis for Presentation of Financial Statements: This standard sets the basic rules for how financial information should be presented in financial statements.
Ensuring Comparability: It aims to improve the comparability of financial statements over time and for different entities.
Improving the Quality of Financial Information: This standard contributes to improving the quality, relevance, reliability, and understandability of financial information provided to users of financial statements.
Providing Useful Information for Decision-Making: IAS 1 Standard helps provide financial information that enables investors, creditors, and other stakeholders to make informed economic decisions.

Scope of IAS 1 Standard:

IAS 1 Standard applies to all general purpose financial statements that are prepared and presented in accordance with International Financial Reporting Standards (IFRS).

General Purpose Financial Statements: Financial statements that are intended to meet the common needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs.

IAS 1 Standard does not apply to:

Condensed interim financial statements: These are covered by IAS 34, “Interim Financial Reporting.”
Financial statements of retirement benefit plans: These are covered by IAS 26, “Accounting and Reporting by Retirement Benefit Plans.”

Components of a Complete Set of Financial Statements:

IAS 1 Standard specifies the components of a complete set of financial statements, which include:

Statement of Financial Position: Also known as the balance sheet, it shows the entity’s assets, liabilities, and equity at a specific date (usually the end of the financial period).
Statement of Profit or Loss: Also known as the income statement, it shows the entity’s performance (profit or loss) over a specific period.
Statement of Comprehensive Income: Presents items that are not recognized in the statement of profit or loss, such as changes in the fair value of certain investments and foreign currency translation differences.
Statement of Changes in Equity: Shows the changes that occurred in the entity’s equity during the financial period, such as the issuance of new shares, dividend distributions, and net profit or loss.
Statement of Cash Flows: Shows the movement of cash inflows and outflows of the entity during the financial period, classifying cash flows into operating, investing, and financing activities.
Notes to the Financial Statements: The notes include an explanation of the significant accounting policies used in preparing the financial statements, additional information about the items in the financial statements, and any other information necessary to understand the financial statements.

The statement of profit or loss and the statement of comprehensive income can be presented in one combined statement or in two separate statements.

Fair Presentation Principles:

IAS 1 Standard requires entities to present their financial statements fairly. Fair presentation requires:

Faithful Representation: The financial statements must faithfully represent the entity’s transactions, events, financial position, financial performance, and cash flows.
Compliance with IFRS: The financial statements must be prepared in accordance with IFRS.
Selection and Application of Accounting Policies Consistently: The entity must select and apply accounting policies consistently from one period to another.
Presentation of Relevant, Reliable, Comparable, and Understandable Information: The financial statements must provide information that meets the needs of users of these statements.
Disclosure of Additional Information: The entity must disclose any additional information necessary to understand the financial statements, even if IFRS does not specifically require its disclosure.

Presentation and Disclosure Requirements:

IAS 1 Standard specifies the minimum items that must be presented in each financial statement, and it also imposes specific disclosure requirements, including:

The name of the reporting entity.
Whether the financial statements are of an individual entity or a group of entities.
The reporting date or the period covered by the financial statements.
The presentation currency.
The level of rounding used in presenting amounts in the financial statements.
A statement of compliance with IFRS.
The significant accounting policies used in preparing the financial statements.
Supporting information for items presented in the financial statements.
Other disclosures required by IFRS.

Structure of Financial Statements:

IAS 1 Standard provides guidance on the structure of financial statements, including:

Statement of Financial Position: Current and non-current assets and liabilities must be distinguished and presented separately in the statement of financial position, unless a presentation based on liquidity provides more reliable and relevant information.
Statement of Profit or Loss: Expenses can be classified either by their nature (e.g., depreciation, salaries) or by their function (e.g., cost of goods sold, administrative expenses).
Statement of Comprehensive Income: Items of other comprehensive income must be presented either as a separate statement or as part of the statement of comprehensive income.
Statement of Changes in Equity: All changes in equity must be present, whether due to transations with owners in their capacity as owners, or from other sources (such as profit or loss).
Statement of Cash Flows: Cash flows must be classified into operating, investing, and financing activities.

Importance of IAS 1 Standard for Companies:

IAS 1 Standard is one of the most important IFRSs, as it provides a general framework for the presentation of financial statements and helps companies to:

Comply with IFRS: IAS 1 Standard ensures that companies prepare their financial statements in accordance with international requirements.
Improve the Quality of Financial Reporting: Applying IAS 1 Standard leads to improved quality, relevance, reliability, and comparability of the financial information presented.
Enhance Investor Confidence: IAS 1 Standard helps build investor confidence by providing more transparent and reliable financial information.
Facilitate Access to Global Markets: Many global stock exchanges prefer companies that prepare their financial statements in accordance with IFRS.

Challenges in Applying IAS 1 Standard:

Judgment: Applying some of the requirements of IAS 1 Standard requires the use of judgment, which may lead to differences in presentation between companies.
Complexity of Some Requirements: Some of the presentation and disclosure requirements in IAS 1 Standard may be complex and require a deep understanding of the standard.
Need for Detailed Information: IAS 1 Standard requires disclosure of detailed information about accounting policies and significant judgments, which may be burdensome for some companies.

Examples of Applying IAS 1 Standard:

Presentation of Current and Non-Current Assets and Liabilities: Company “A” classifies its assets and liabilities into current and non-current in the statement of financial position, classifying assets that it expects to convert into cash within one year as current assets, while classifying assets that it expects to hold for more than one year as non-current assets.
Classification of Expenses by Function: Company “B” classifies its expenses in the statement of profit or loss by function, presenting the cost of goods sold separately from administrative and marketing expenses.
Disclosure of Accounting Policies: Company “C” discloses the significant accounting policies it applies in preparing its financial statements, such as the inventory valuation method and the depreciation method, in the notes to the financial statements.
Presentation of Statement of Comprehensive Income: Company “D” present the statement of other comprehensive income as a part of one statement of comprehensive income, presenting the changes in fair value of its available-for-sale investments.

Role of Technology in Applying IAS 1 Standard:

Accounting software and Enterprise Resource Planning (ERP) systems help in applying IAS 1 Standard more efficiently and accurately through:

Automating the process of preparing financial statements in accordance with the requirements of IAS 1 Standard.
Providing tools to classify and present financial information correctly.
Managing the disclosures required by IAS 1 Standard.
Improving the accuracy and comprehensiveness of the financial information presented.

Conclusion:

IAS 1 Standard, “Presentation of Financial Statements,” is the guideline for companies to present their financial information clearly, understandably, and reliably. Applying this standard contributes to enhancing the transparency and credibility of financial statements and facilitates their comparability over time and between different companies. Understanding IAS 1 Standard is essential for accountants, auditors, investors, and anyone seeking to understand how financial information is presented in financial statements in accordance with IFRS. With the ongoing development of the business environment, IFRS, including IAS 1 Standard, are expected to continue to be updated to ensure that they meet the needs of users of financial statements and provide relevant information for decision-making.