101 presentation of financial statements

Financial Statements 101

Janet Berry-Johnson, CPA

Reviewed by

January 13, 2021

This article is Tax Professional approved

Financial statements are like the financial dashboard of your business. They tell you where your money is going, where it’s coming from, and how much you’ve got to work with. They’re super helpful for making smart business moves. And they’re 100% necessary if you want to get a loan or bring on investors.

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If you’re looking for a good intro to financial statements, read on. We’ll go over the basics of each financial statement, and how to read (and use) them—so your business runs like a well-oiled machine.

What are financial statements?

Financial statements are reports that summarize important financial accounting information about your business. There are three main types of financial statements: the balance sheet, income statement, and cash flow statement.

Together, they give you—and outside people like investors—a clear picture of your company’s financial position.

We’ll look at what each of these three basic financial statements do, and examine how they work together to give you a full picture of your company’s financial health.

The balance sheet

A balance sheet is a snapshot of your business finances as it currently stands. It tells you about the assets you own, and liabilities (i.e., debts) you owe, at a particular point in time.

How often your bookkeeper prepares a balance sheet for you will depend on your business. Some businesses get daily or monthly financial statements, some prepare financial statements quarterly, and some only get a balance sheet once a year.

For example, banks move a lot of money, so they prepare a balance sheet every day. On the other hand, a small Etsy shop might only get a balance sheet every three months.

Balance sheets are broken up into three general categories: assets, liabilities, and equity.

Here’s an example of what a balance sheet looks like if you’re a Bench customer.

Assets are anything valuable that your company owns.

On the Bench balance sheet shown above, assets consist of:

• Money in a checking account and
• Money in transit (being transferred from another account)

But total assets can also include things like equipment, furniture, land, buildings, notes receivable, and even intangible property such as patents and goodwill.

Liabilities

Liabilities are debts you owe to other people. On our balance sheet example above, the only liability is a bank loan. But total liabilities can also include credit card debt, mortgages, and accrued expenses such as utilities, taxes, or wages owed to employees.

Equity is the remaining value of the company after subtracting liabilities from assets. This might be retained revenue—money the company has earned to date—as in the example above.

In the Bench balance sheet, you’ll also note a modification to the equity, a shareholder drawing of $7,380.58. This means someone who owns part of the company has withdrawn some money from shareholder’s equity. This is a way some business owners choose to pay themselves.

Equity can also consist of private or public stock, or else an initial investment from your company’s founders.

For instance, suppose you started an online store, and put $1,000 in its bank account as operating capital (to pay web hosting costs and other expenses). Before you even made a sale, that $1,000 would be listed as owner’s equity on your balance sheet.

It’s important to note that equity is only the “book value” of your company. It’s not your business’ market value if you wanted to sell the business. When selling a business , buyers usually pay more than the book value of the business based on things like the company’s annual earnings, the market value of tangible and intangible property it owns, and more.

The balance sheet formula

To grasp how the three categories on the balance sheet work together, remember this formula:

Equity = Assets – Liabilities

To put it simply: Whatever value (equity) your business actually has consists of what it owns (assets) minus what it owes ( liabilities ).

Further reading: What Are Assets, Liabilities, and Equity?

Using the balance sheet in real life

Here’s an example to explain how it works. Let’s say you run a food cart selling vegan, gluten-free, organic popsicles.

At the end of June, you get a balance sheet from your bookkeeper. It looks like this:

June Balance Sheet

Not bad! It’s summer, your busiest time of year. One month passes.

At the end of July, your balance sheet shows this:

July Balance Sheet

Nice. You’ve added $1,000 to your retained earnings by saving more cash, even though your liabilities haven’t changed.

This is useful information. But it’s not the full picture.

Do your balance sheets tell you…

…how many popsicles you sold? No.

…how much cash you received? No.

…how much it cost you to make the popsicles you sold? No.

…how much you spent on expenses? No.

This is where the income statement comes in.

The income statement

While the balance sheet is a snapshot of your business’s financials at a point in time, the income statement (sometimes referred to as a profit and loss statement) shows you how profitable your business was over an accounting period, such as a month, quarter, or year. It shows you how much you made (revenue) and how much you spent (expenses).

Here’s an example of an income statement, from the Bench app.

Revenue: how much you earned from selling popsicles

Cost of Goods Sold (COGS): the total amount it cost you to make the popsicles: popsicle sticks, locally-sourced ingredients, etc. (here’s a fuller explanation of COGS )

Gross Profit: Gross Profit = Revenue - COGS

Operating Expenses : the cost of running your business, not including COGS

Net Profit: Net Profit = Gross Profit - Operating Expenses

Gross Profit: tells you how profitable your products are

When you subtract the COGS from revenue, you see just how profitable your products are. This is very useful. In the above example, the revenue is about 10x the COGS, which is a healthy gross profit margin.

If your COGS and revenue numbers are close together, that means you’re not making very much money per sale.

Further reading: Gross Profit: A Simple Introduction

Net Profit: tells you how profitable your business is

Just because your products are profitable, doesn’t mean your business is profitable. You could be making a killing on every popsicle, but spending so much on advertising that you walk away with nothing.

Using the income statement in real life

Suppose we have an income statement for July that looks like this:

July Income Statement

You sold $1,000 worth of popsicles. If popsicles cost $4 each (they’re vegan, gluten-free, and organic, after all), that means you sold 250 popsicles.

What does the income statement tell us that the balance sheet doesn’t?

With this info, you know how many more popsicles you have left in inventory—and how many more you should be prepared to make next July.

What else? There are two expenses here besides interest expense: electricity and maintenance. Looking back over your income statements, you’ll be able to see which months you spend more on electricity, and roughly how often you need to pay for maintenance on your popsicle cart.

More importantly, you’ll be able to plan ahead for more expensive months (electricity-wise) and know roughly how much money to set aside for maintenance.

You can only get this kind of information from the income statement.

But what’s missing?

Does your income statement tell you…

…how much money you have in the bank? No.

…how much money you owe to your credit card company? No.

…how much equity you have in the business? No.

…how much money you had one month ago vs. six months or a year ago? No.

To get that info, you need snapshots of your business’s finances. You get those from the balance sheet.

Most small businesses track their financials only using balance sheets and income statements. But depending on how you do your financial reporting, you may need a third type of statement.

The cash flow statement

The cash flow statement tells you how much cash entered and left your business over a particular time period.

Cash flow statements (also known as the statement of cash flows) are typically only prepared for companies that use the accrual accounting method . This is because under the accrual method, a company’s income statement might include revenue that the company has earned but not yet received, and expenses the company has incurred but not yet paid.

For example, under the accrual method, if you sold a $5 popsicle to a customer, and accepted an I.O.U. as payment, that $5 would appear as revenue on your income statement, even if you hadn’t received the payment in your bank account.

Here’s an example cash flow statement, using our popsicle stand from before:

The cash flow statement has three parts:

• Cash Flows from Operations. This is what you make and spend in the normal course of doing business.
• Cash Flow from Investing Activities. This is money you invest—in this case, by purchasing new equipment for your business.
• Cash Flow from Financing Activities. This includes money the owner invested in the business, as well as taking out and repaying loans. In this case, the business got additional financing in the form of a $1,200 bank loan.

Using the cash flow statement in real life

The cash flow statement tells you how much cash you collected and paid out over the year. This can help you predict future cash surpluses and shortages, and help you plan to have enough cash on hand to cover rent or pay the heating bill.

A balance sheet might show you have $1,000 in accounts receivable, and your income statement shows you earned $1,000 of revenue. But if your clients haven’t paid you that money yet, you don’t have the cash on hand. So the cash flow statement “corrects” line items—for instance, deducting that $1,000 from your cash on hand, since it’s not yet available to cover your costs.

What does this cash flow statement tell you?

Mainly, this statement tells you that, despite pretty nice revenue and low expenses, you don’t have a lot of cash inflows from your normal operations—just $100 for the month. Most of your cash on hand came from the proceeds of a bank loan.

To increase your company’s cash flow from operating activities, you need to speed up your accounts receivable collection. That could mean telling customers you’ll only accept cash rather than I.O.U.s, or requiring your customers to pay outstanding invoices within 15 days rather than 30 days.

In either case, your cash flow statement has shown you a different side of your business—the cash flow side, which is invisible on your balance sheets and income statements.

Using financial statements to grow your business

Once you get used to reading financial statements, they can actually be fun. By analyzing your net income and cash flows, and looking at past trends, you’ll start seeing many ways you can experiment with optimizing your financial performance.

Here are a few practical ways financial statements can help your business grow.

Investing in assets

Say your popsicle cart blows a tire every other month, and you have to pay $50 in maintenance expenses each time. That’s $300 a year (as you’ve learned from your income statements).

But suppose the cost of buying a new, top-of-the-line cart, one that has kevlar tank treads instead of rubber tires, is $600. You can calculate that, over the course of two years, it’ll pay for itself.

Securing a loan

One person can only serve so many popsicles. Suppose you can’t keep up with demand during the busy summer months. The line at your cart grows so long some days, people get frustrated and leave before they even buy one of your popsicles.

At this point, it may make sense to hire a second (seasonal) employee and get a bigger cart. But you need a loan in order to do that.

Before lending you more money, the bank will want to know about your company’s financial position. They want to know how much you make, how much you spend, and how responsible your company’s management is with your business finances. This information is a good indicator of whether you’ll be in business long enough to pay off your loan.

That’s when financial statements are invaluable. With properly prepared balance sheets and income statements, you’re equipped to prove your business is sustainable—and get ahold of the resources you need to expand it.

Finally, without properly prepared financial statements, filing your taxes can be a nightmare. Not only do financial statements tell you how much income to report, but they also give you an overview of the expenses you’ve incurred—some of which can be written off as small business tax deductions .

How Bench can help

By carefully collecting data and crunching the numbers, you can prepare your own financial statements. But, chances are, you didn’t start your own business so you could be hunched over a calculator every night. That’s where a bookkeeper comes in handy.

An experienced bookkeeper can prepare your financial statements for you, so you can make smart financial decisions without all the tedious paperwork. Plus, when it’s time to file your income taxes, you’ll know your financials are 100% comprehensive and correct, ready to be handed off to your accountant.

Don’t have a bookkeeper? Check out Bench. We’ll do your bookkeeping for you, prepare financial statements every month, and give you access to the Bench app where you can keep tabs on your finances. Learn more .

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IAS 1 Presentation of Financial Statements

Presentation of financial statements sets out the overall requirements for the presentation of financial statements, guidelines for their structure, and minimum requirements for their content., access the standard, current proposals, recent amendments, related ifric interpretations, uk reduced disclosures – frs 101, icaew factsheets and guides, icaew articles, other resources.

• 2023 Issued Standard – IAS 1 The 2023 Issued Standards include all amendments issued up to and including 1 January 2023.

Registration is required to access the free version of the Issued Standards, which do not include additional documents that accompany the full standard (such as illustrative examples, implementation guidance and basis for conclusions).

A complete set of financial statements includes:

• A statement of financial position (balance sheet) at the end of the period
• A statement of profit or loss and other comprehensive income (income statement) for the period
• A statement of changes in equity for the period
• A statement of cash flows (cash flow statement) for the period
• Notes to the accounts.

The names of the main statements are not mandatory.

IAS 1 Revised also requires a statement of financial position at the start of the earliest comparative period where there has been a retrospective adjustment to the accounts or reclassification of items.

The statement of profit or loss and other comprehensive income, as the name suggests, presents profit and loss for the period as well as other comprehensive income. Other comprehensive income includes income and expenses not recognised in profit or loss such as revaluation surpluses. The statement of profit or loss and other comprehensive income may be presented either as one statement or a separate statement of profit or loss and statement showing other comprehensive income.

The standard provides guidance on the form and content of the financial statements and the underlying accounting concepts. It also requires financial statements to present fairly the position, performance and cash flows of an entity. This is normally achieved by the application of IFRS.

ED/2019/7 General Presentation and Disclosures was issued in December 2019. This is the exposure draft of a proposed new standard that would replace IAS 1. The standard would carry forward most of the current requirements of IAS 1 and add supplementary requirements, including:

• Categorising items in profit or loss as operating, investing or financing
• Requiring additional profit subtotals
• Distinguishing between integral and non-integral associates and joint ventures
• Removing the choice of how to present cash flows from dividends and interest
• Requiring additional disclosure about unusual items
• Providing disclosure of management performance measures.

All amendments issued up to and including the publication date of 1 January 2022 are included within the IFRS Foundation’s latest version of the issued standard: 2022 Issued Standard – IAS 1 . Issued amendments may, therefore, have a mandatory effective date that is later than 1 January 2022 – see below for details.

Any amendments issued after 1 January 2022 will not be included in the IFRS Foundation’s 2022 Issued Standards but will be listed below and identified as such.

See the Corporate Reporting Faculty’s annual IFRS factsheets  for a more detailed discussion of recent IFRS amendments.

Mandatory date: Annual periods beginning on or after 1 January 2024. Earlier application is permitted.

Issue date: October 2022 (not included within the IFRS Foundation’s 2022 Issued Standards).

The amendments specify that the classification of a liability as current or non-current is only affected by covenants that an entity must comply with on or before the end of the reporting period. They also require disclosure of information that allows users of financial statements to understand the risk that non-current liabilities with covenants could become repayable within 12 months.

This amendment has been endorsed for use in the UK. It is not yet endorsed for use in the EU as at 25 July 2023. Read more on UK endorsement  and EU endorsement  of IFRS standards.

For a more detailed discussion of the amendment, read the faculty’s factsheet:

• 2022 IFRS Accounts

Mandatory date: Annual periods beginning on or after 1 January 2024 (deferred from 2023). Earlier application is permitted.

IAS 1 is amended to clarify that the classification of liabilities as current or non-current should be based on rights that exist at the end of the reporting period. Expectations about whether an entity will exercise a right to defer settlement of a liability do not affect its classification. The amendments also clarify that settlement is the transfer of cash, equity instruments, other assets or services.

The deferral of the effective date to 2024 is included in the Non-current Liabilities with Covenants amendment to IAS 1.

Mandatory date: Annual periods beginning on or after 1 January 2023. Earlier application is permitted.

The amendments to IAS 1:

• Require an entity to disclose material accounting policy information rather than significant accounting policies.
• Explain that accounting policy information is material if, together with other information in the financial statements, it can reasonably be expected to influence decisions that primary users make.
• Provide examples of material accounting policies.
• Clarify that accounting policy information relating to immaterial transactions need not be disclosed.

IAS 1 is amended to:

• Add finance income and expenses to the list of components of other comprehensive income;
• Require line items to be presented in the statement of financial position in respect of contracts that are within the scope of IFRS 17;
• Require line items to be presented in the statement of profit or loss in respect of amounts related to contracts within the scope of IFRS 17.

IAS 1 is amended to refer to portfolios of contracts rather than groups of contracts within the scope of IFRS 17.

Mandatory date: Annual periods beginning on or after 1 January 2020. Earlier application is permitted.

The definition of material is amended to be as follows:

Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.

Examples of circumstances that may result in material information being obscured are added to the standard as a result of the amendment, as is guidance on users of financial statements.

• 2020 IFRS Accounts

Mandatory date: Annual periods beginning on or after 1 January 2020. Earlier application is permitted if an entity also applies the amendments to other IFRS Accounting Standards at the same time.

IAS 1 is updated to refer to the 2018 Conceptual Framework rather than the Framework for the Preparation and Presentation of Financial Statements when referring to materiality, definitions of elements and their recognition criteria and the objective of financial statements.

• IFRIC 1 Existing Decommissioning, Restoration and Similar Liabilities Addresses accounting for a change in a provision that is included in the carrying amount of an item of PPE.
• IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction Provides general guidance on how to assess the limit in IAS 19 on the amount of the surplus that can be recognised as an asset. Explains how the pensions asset or liability may be affected when there is a statutory or contractual minimum funding requirement.
• IFRIC 17 Distribution of Non-cash Assets to Owners Addresses the accounting for dividends of non-cash assets, including those where there is a cash alternative.
• IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments Addresses the accounting by an entity which issues equity instruments in order to settle, in full or part, a financial liability.
• IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine Addresses the accounting treatment of mine waste materials, which are the materials removed by mining entities in order to gain access to mineral ore deposits.
• IFRIC 21 Levies Provides guidance on when to recognise liability for a levy imposed by a government.
• IFRIC 23 Uncertainty over Income Tax Treatments Clarifies how to apply the recognition and measurement requirements of IAS 12 when there is uncertainty over income tax treatments.
• SIC 7 Introduction of the Euro The effective start of the EMU after the reporting date does not alter the requirements of IAS 21 at the reporting date.
• SIC 25 Income Taxes – Changes in the Tax Status of an Enterprise or its Shareholders Addresses the deferred tax consequences of changes in tax status of an enterprise or its shareholders.
• SIC 29 Disclosure – Service Concession Arrangements Prescribes disclosures required by a concession operator and concession provider joined by a service concession arrangement.
• SIC 32 Intangible Assets – Website Costs Addresses accounting for costs associated with the development of a website.

UK qualifying parents and subsidiaries can take advantage of FRS 101 Reduced Disclosure Framework. Our FRS 101 page  gives more information on which entities qualify and the criteria to be met.

The following amendments must be made to IAS 1 in order to achieve compliance with the Companies Act and related Regulations:

• The statement of financial position must comply with the balance sheet format requirements of the Companies Act.
• The statement of profit or loss and other comprehensive income must comply with the profit and loss account format requirements of the Companies Act.
• Ordinary activities of an entity are defined and extraordinary items are described as highly abnormal material items arising from events falling outside an entity’s ordinary activities.
• It is clarified that items of income or expense are not recognised in profit or loss where such recognition is prohibited by the Companies Act.

FRS 101 paragraph 8(f) states that a qualifying entity is exempt from the IAS 1 requirement to present the following within a set of financial statements:

• A statement of cash flows for the period;
• A third statement of financial position when a retrospective adjustment or reclassification is made;
• A statement of compliance with IFRS;
• A reconciliation of property, plant and equipment, intangible assets, investment properties, biological assets and the number of shares outstanding at the beginning and end of the comparative period;
• Capital management disclosures (this exemption is not available to a financial institution);
• All remaining IAS 1 disclosures must be applied.

IAS 1 paragraphs for which exemption is available: 10(d), 10(f), 16, 38A-D, 40A-D, 111, 134-6.

The Corporate Reporting Faculty's annual IFRS factsheets  provide a more detailed discussion of recent IFRS amendments.

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Topic 101 - Presentation of Financial Statements

• IFRS Accounting Standards

This topic includes FAQs relating to the following IFRS standards, IFRIC Interpretations and SIC Interpretations:

Other resources

• IFRS At a Glance by standard is available here .

Sub-topic within this main topic are set out below, with links to IFRS Interpretation Committee agenda decisions and BDO IFRS FAQs relating to that sub-topic below each sub-topic :

The Interpretations Committee observed that a complete set of financial statements is comprised of items recognised and measured in accordance with IFRS.

The Interpretations Committee noted that IAS 1 addresses the overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. It also noted that while IAS 1 does permit flexibility in presentation, it also includes various principles for the presentation and content of financial statements as well as more detailed requirements. These principles and more detailed requirements are intended to limit the flexibility such that financial statements present information that is relevant, reliable, comparable and understandable.

The Interpretations Committee observed that securities regulators, as well as some members of the Interpretations Committee, were concerned about the presentation of information in the financial statements that is not determined in accordance with IFRS. They were particularly concerned when such information is presented on the face of the primary statements. The Interpretations Committee noted that it would be beneficial if the IASB’s Disclosure Initiative considered what guidance should be given for the presentation of information beyond what is required in accordance with IFRS.

Consequently, the Interpretations Committee determined that it should not propose an Interpretation nor an amendment to a Standard and consequently decided not to add this issue to its agenda.

Back to sub-topic index

IFRIC Agenda Decision - Going concern disclosure

July 2010 - The Committee received a request for guidance on the disclosure requirements in IAS 1 on uncertainties related to an entity’s ability to continue as a going concern.

How an entity applies the disclosure requirements in paragraph 25 of IAS 1 requires the exercise of professional judgement. The Committee noted that paragraph 25 requires that an entity shall disclose ‘material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern’. The Committee also noted that for this disclosure to be useful it must identify that the disclosed uncertainties may cast significant doubt upon the entity’s ability to continue as a going concern.

The Committee noted that IAS 1 provides sufficient guidance on the disclosure requirements on uncertainties related to an entity’s ability to continue as a going concern and that it does not expect diversity in practice. Therefore, the Committee decided not to add the issue to its agenda.

IFRIC Agenda Decision - Disclosure requirements relating to assessment of going concern

July 2014 - The Interpretations Committee received a submission requesting clarification about the disclosures required in relation to material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern. 

The Interpretations Committee proposed to the IASB that it should make a narrow-scope amendment to change the disclosure requirements in IAS 1 in response to this issue. At its meeting in November 2013 the IASB discussed the issue and considered amendments proposed by the staff, but decided not to proceed with these amendments and removed this topic from its agenda. Consequently, the Interpretations Committee removed the topic from its agenda. 

The staff reported the results of the IASB’s discussion to the Interpretations Committee. When considering this feedback about the IASB’s decision, the Interpretations Committee discussed a situation in which management of an entity has considered events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern. Having considered all relevant information, including the feasibility and effectiveness of any planned mitigation, management concluded that there are no material uncertainties that require disclosure in accordance with paragraph 25 of IAS 1. However, reaching the conclusion that there was no material uncertainty involved significant judgement. 

The Interpretations Committee observed that paragraph 122 of IAS 1 requires disclosure of the judgements made in applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements. The Interpretations Committee also observed that in the circumstance discussed, the disclosure requirements of paragraph 122 of IAS 1 would apply to the judgements made in concluding that there remain no material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern.

IFRIC Agenda Decision - Presentation of Liabilities or Assets Related to Uncertain Tax Treatments

September 2019 - The Committee received a request about the presentation of liabilities or assets related to uncertain tax treatments recognised applying IFRIC 23  Uncertainty over Income Tax Treatments (uncertain tax liabilities or assets). The request asked whether, in its statement of financial position, an entity is required to present uncertain tax liabilities as current (or deferred) tax liabilities or, instead, can present such liabilities within another line item such as provisions. A similar question could arise regarding uncertain tax assets.

The definitions in IAS 12 of current tax and deferred tax liabilities or assets

When there is uncertainty over income tax treatments, paragraph 4 of IFRIC 23 requires an entity to ‘recognise and measure its current or deferred tax asset or liability applying the requirements in IAS 12 based on taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates determined applying IFRIC 23’. Paragraph 5 of IAS 12  Income Taxes defines:

Consequently, the Committee observed that uncertain tax liabilities or assets recognised applying IFRIC 23 are liabilities (or assets) for current tax as defined in IAS 12, or deferred tax liabilities or assets as defined in IAS 12.

Presentation of uncertain tax liabilities (or assets)

Neither IAS 12 nor IFRIC 23 contain requirements on the presentation of uncertain tax liabilities or assets. Therefore, the presentation requirements in IAS 1 apply. Paragraph 54 of IAS 1 states that ‘the statement of financial position shall include line items that present: …(n) liabilities and assets for current tax, as defined in IAS 12; (o) deferred tax liabilities and deferred tax assets, as defined in IAS 12…’.

Paragraph 57 of IAS 1 states that paragraph 54 ‘lists items that are sufficiently different in nature or function to warrant separate presentation in the statement of financial position’. Paragraph 29 requires an entity to ‘present separately items of a dissimilar nature or function unless they are immaterial’.

Accordingly, the Committee concluded that, applying IAS 1, an entity is required to present uncertain tax liabilities as current tax liabilities (paragraph 54(n)) or deferred tax liabilities (paragraph 54(o)); and uncertain tax assets as current tax assets (paragraph 54(n)) or deferred tax assets (paragraph 54(o)).

The Committee concluded that the principles and requirements in IFRS Standards provide an adequate basis for an entity to determine the presentation of uncertain tax liabilities and assets. Consequently, the Committee decided not to add the matter to its standard-setting agenda.

IFRIC Agenda Decision - Supply Chain Financing Arrangements—Reverse Factoring

December 2020 - The Committee received a request about reverse factoring arrangements. Specifically, the request asked:

In a reverse factoring arrangement, a financial institution agrees to pay amounts an entity owes to the entity’s suppliers and the entity agrees to pay the financial institution at the same date as, or a date later than, suppliers are paid.

Presentation in the statement of financial position

IAS 1  Presentation of Financial Statements specifies how an entity is required to present its liabilities in the statement of financial position.

Paragraph 54 of IAS 1 requires an entity to present ‘trade and other payables’ separately from other financial liabilities. ‘Trade and other payables’ are sufficiently different in nature or function from other financial liabilities to warrant separate presentation (paragraph 57 of IAS 1). Paragraph 55 of IAS 1 requires an entity to present additional line items (including by disaggregating the line items listed in paragraph 54) when such presentation is relevant to an understanding of the entity’s financial position. Consequently, an entity is required to determine whether to present liabilities that are part of a reverse factoring arrangement:

Paragraph 11(a) of IAS 37  Provisions, Contingent Liabilities and Contingent Assets states that ‘trade payables are liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier’. Paragraph 70 of IAS 1 explains that ‘some current liabilities, such as trade payables… are part of the working capital used in the entity’s normal operating cycle’. The Committee therefore concluded that an entity presents a financial liability as a trade payable only when it:

Paragraph 29 of IAS 1 requires an entity to ‘present separately items of a dissimilar nature or function unless they are immaterial’. Paragraph 57 specifies that line items are included in the statement of financial position when the size, nature or function of an item (or aggregation of similar items) is such that separate presentation is relevant to an understanding of the entity’s financial position. Accordingly, the Committee concluded that, applying IAS 1, an entity presents liabilities that are part of a reverse factoring arrangement:

The Committee observed that an entity assessing whether to present liabilities that are part of a reverse factoring arrangement separately might consider factors including, for example:

Derecognition of a financial liability

An entity assesses whether and when to derecognise a liability that is (or becomes) part of a reverse factoring arrangement applying the derecognition requirements in IFRS 9 Financial Instruments.

An entity that derecognises a trade payable to a supplier and recognises a new financial liability to a financial institution applies IAS 1 in determining how to present that new liability in its statement of financial position (see ‘Presentation in the statement of financial position’).

Notes to the financial statements

An entity applies judgement in determining whether to provide additional disclosures in the notes about the effect of reverse factoring arrangements on its financial position, financial performance and cash flows. The Committee observed that:

The Committee noted that making materiality judgements involves both quantitative and qualitative considerations.

The Committee concluded that the principles and requirements in IFRS Standards provide an adequate basis for an entity to determine the presentation of liabilities that are part of reverse factoring arrangements, the presentation of the related cash flows, and the information to disclose in the notes about, for example, liquidity risks that arise in such arrangements. Consequently, the Committee decided not to add a standard-setting project on these matters to the work plan.

IFRIC Agenda Decision - Normal operating cycle

June 2005 - The IFRIC considered an issue regarding the classification of current and non⁠–⁠current assets by reference to an entity's normal operating cycle. It was asked whether the guidance in paragraph 57(a) (now paragraph 66(a)) of IAS 1 was applicable only if an entity had a predominant operating cycle. This is particularly relevant to the inventories of conglomerates which, on a narrow reading of the wording, might always have to refer to the twelve⁠–⁠month criterion in paragraph 57(c) (now paragraph 66(c)) of IAS 1, rather than the operating cycle criterion.

The IFRIC decided not to consider the question further because, in its view, it was clear that the wording should be read in both the singular and the plural and that it was the nature of inventories in relation to the operating cycle that was relevant to classification. Furthermore, if inventories of different cycles were held, and it was material to readers' understanding of an entity's financial position, then the general requirement in paragraph 71 (now paragraph 57) of IAS 1 already required disclosure of further information.

IFRIC Agenda Decision - Current /non-current classification of a callable term loan

November 2010 - The Committee received a request on the classification of a liability as current or non-current when the liability is not scheduled for repayment within twelve months after the reporting period, but may be callable by the lender at any time without cause. The Committee notes that paragraph 69(d) of IAS 1 requires that a liability must be classified as a current liability if the entity does not have the unconditional right at the reporting date to defer settlement for at least twelve months after the reporting period.

The Committee noted that IAS 1 provides sufficient guidance on the presentation of liabilities as current or noncurrent and that it does not expect diversity in practice. Consequently, the Committee decided not to add the issue to its agenda.

Scope of IAS 1.69

Which liabilities do the classification requirements of IAS 1.69 apply to?

Analysis:  The requirements of IAS 1.69 apply to all types of liabilities (e.g. bank borrowings, corporate bonds, lease liabilities, contract liabilities and accounts payable) except for deferred tax liabilities, which are always presented as non-current (IAS 1.56).

The only exception to this requirement is when a presentation based on liquidity provides information that is more reliable and more relevant (i.e. a ‘non-classified’ statement of financial position – IAS 1.60). Such a presentation is common for financial institutions such as banks and insurance companies. In these cases, a distinction between current and non-current assets and liabilities is not made in the statement of financial position.

Unit of account for applying IAS 1.69

Are liabilities divided into current and non-current portions?

Analysis:  If a portion of a liability does not meet any of the criteria in IAS 1.69, then that portion of the liability is presented as non-current.

For example, many bank loans and lease liabilities are amortising, with regular payments of principal and interest. Those payments that are contractually due within the next 12 months result in IAS 1.69(d) being met as the entity does not have an unconditional right to defer settlement of those portions of the liability for at least 12 months. Therefore, those payments are classified as current.

As long as the remaining portion (or portions) do not meet any of the criteria in IAS 1.69, the payments due more than 12 months after the reporting period are classified as non-current liabilities.

Effect of covenants – compliance with covenants

Entity Z has a 31 December 2020 year-end. Entity Z has a term loan with a bank, which requires it to repay the entire capital balance on 31 December 2024. Included in the loan agreement is a covenant requiring Entity Z to maintain a specified financial ratio as at each year-end. If Entity Z does not satisfy the covenant, then the bank has the right to demand that Entity Z repay the loan immediately.

Entity Z has met the specified financial ratio as at 31 December 2020. How does Entity Z classify the capital element of the bank loan in its 31 December 2020 financial statements?

Analysis:  IAS 1.69(d) is not met because Entity Z has an unconditional right to defer settlement of the liability for at least 12 months because it satisfies the covenant in the loan and therefore the bank does not have the right to demand repayment of the loan in the next 12 months. None of the other criteria in IAS 1.69 are met.

The capital amount of the bank loan is classified as a non-current liability.

Effect of covenants – waiver received subsequent to period end

Same fact pattern as FAQ 101.8.2.3 except Entity Z does not meet the covenant as at 31 December 2020, however, on 15 February 2021, before the financial statements are authorised for issue by the Board of Directors, Entity Z receives a waiver of the covenant violation from its bank. Therefore, the bank has stated that it will not demand repayment of the loan in 2021.

How does Entity Z classify the bank loan in its 31 December 2020 financial statements?

Analysis:  IAS 1.69(d) is met because Entity Z does not have an unconditional right to defer settlement of the liability for at least 12 months as at its reporting date of 31 December 2020 . IAS 1.74 requires that:

When an entity breaches a provision of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand, it classifies the liability as current, even if the lender agreed, after the reporting period and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach. An entity classifies the liability as current because, at the end of the reporting period, it does not have an unconditional right to defer its settlement for at least twelve months after that date.

The bank granting the waiver is a non-adjusting event after the reporting period. It does not affect the classification of the bank loan as at 31 December 2020. This requirement differs from certain other financial reporting frameworks (e.g. US GAAP), where receipt of a waiver of a covenant violation after period end may affect the classification of the liability as at the reporting date.

Entity Z may be required to disclose the waiver as a non-adjusting event after the reporting period in accordance with IAS 10.21.   

Effect of covenants – waiver received prior to period end

Same fact pattern as FAQ 101.8.2.3 except Entity Z is concerned that it will not meet its financial covenant as at 31 December 2020, so it discusses the matter with its bank in November 2020. On 15 December 2020, the bank agrees to waive the covenant as at 31 December 2020, meaning Entity Z does not need to comply with the covenant as at 31 December 2020. Entity Z needs to comply with the covenant as at future reporting dates (in this fact pattern, the next covenant test will be on 31 December 2021).

Analysis:  IAS 1.69(d) is not met because, as at its reporting date, Entity Z has an unconditional right to defer settlement of the liability for at least 12 months. The waiver was received prior to the period end, meaning that it is taken into account in assessing whether any of the criteria in IAS 1.69 were met. IAS 1.75 requires (continuing on from IAS 1.74, see FAQ 101.8.2.4):

However, an entity classifies the liability as non-current if the lender agreed by the end of the reporting period to provide a period of grace ending at least twelve months after the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment.

The capital amount of the bank loan is therefore classified as a non-current liability. 

Effect of covenants – covenants tested after period end

Same fact pattern as FAQ 101.8.2.3 except the banking agreement states that the covenants will be tested based on the audited financial statements once they are approved and released. Entity Z expects to issue its audited financial statements for the period ended 31 December 2020 by 1 March 2021. Entity Z violates its financial covenant as at 31 December 2020 based on its audited financial statements.

Since the audited financial statements were not available as at 31 December 2020, is the breach of covenant a non-adjusting event after the reporting period, meaning that it does not affect the classification of the loan as current or non-current?

Analysis:  No. The loan is required to be classified as current regardless of the fact that the audited financial statements were not yet available, as the conditions that led to the breach already existed at the reporting date.  The audited financial statements provide evidence of that breach.

Effect of covenants – quarterly testing

Entity Y has a 31 December 2020 year-end. Entity Y has a term loan from a bank, which requires it to repay the entire capital balance on 31 December 2024. Included in the loan agreement is a covenant requiring Entity Y to maintain a specified financial ratio as at each quarter end (e.g. March, June, September and December). If Entity Y does not satisfy the covenant at any of these dates, then the bank has the right to demand that Entity Y repay the loan immediately.

Entity Y has met the specified financial ratio as at 31 December 2020. How does Entity Y classify the bank loan in its 31 December 2020 financial statements?

Analysis:  The criterion in IAS 1.69(d) is not met because Entity Z has an unconditional right to defer settlement of the liability for at least 12 months because it satisfies the covenant in the loan at its reporting date. Therefore, as at that date, the bank does not have the right to demand repayment of the loan in the next 12 months.

The fact that compliance with the covenant will be tested again in less than 12 months (e.g. 31 March 2021) does not change the fact that, as at its reporting date, Entity Y complies with the covenant. The subsequent covenant tests are based on the financial ratios at those future dates, which do not affect conditions as at 31 December 2020.

The bank loan is classified as a non-current liability.

Effect of covenants – quarterly testing with violation after period end

Same fact pattern as FAQ 101.8.2.7, except it is currently 5 April 2021 and the 31 December 2020 financial statements have not been completed. Entity Y met its loan covenant as at 31 December 2020, but Entity Y has violated its covenant as at 31 March 2021.

How does Entity Y classify the bank loan in its 31 December 2020 financial statements?

Analysis:  The criterion in IAS 1.69(d) is not met because Entity Z has an unconditional right to defer settlement of the liability for at least 12 months because it satisfies the covenant in the loan at its reporting date. Therefore the bank does not have the right to demand repayment of the loan in the next 12 months.

The fact that compliance with the covenant will be tested again in less than 12 months (e.g. 31 March 2021) does not change the fact that, as at its reporting date, Entity Y complies with the covenant. The subsequent breach of covenant as at 31 March 2021 does not affect conditions as at 31 December 2020.

The bank loan is classified as a non-current liability. Failure to comply with the covenant as at 31 March 2021 should be disclosed as a non-adjusting subsequent event in the 31 December 2020 financial statements (IAS 10.21).

Conditional rollover rights

Entity M has a loan that is due for repayment within 12 months of the reporting period end. The terms of the loan grant Entity M the option to roll over the loan for another 12 months, with the rollover being conditional on Entity M passing a financial test.

How is the loan classified as at Entity M’s period end if the rollover has not taken place?

Analysis:  The classification depends on the precise facts and circumstances. IAS 1.73 states that if an entity expects, and has the discretion, to refinance or roll over an obligation for at least 12 months after the reporting period under an existing loan facility, then it is classified as non-current. An entity must assess whether it has the ‘discretion’ to do so.  For example, discretion in respect of a financial ratio test would include consideration of whether the entity expects to pass that test.  This would include circumstances in which an entity would not currently pass the test, but could take action to enable it to do so by the time the test is required to be carried out.

Consequently, the loan is classified as non-current if the rollover conditions are perfunctory and/or are within Entity M’s control (e.g. not to sell a subsidiary or to enter into other loan agreements) and management expects to exercise the option to roll over the loan.

The loan is classified as current if management does not intend to roll over the loan. The loan will also be classified as current if the rollover condition(s) have been breached and management can do nothing to rectify the position (e.g. a covenant which requires that a particular subsidiary is not sold, and the subsidiary has already been sold by the financial period end).

Rollover agreed to prior to period end with a different lender

Entity N will be required to repay a bank loan within 12 months of period end. Before period end, Entity N enters into an agreement with a new bank where the new bank will ‘roll’ the old loan into a new loan, which will not be repayable for another 5 years.  

How is the loan classified as at period end?

Analysis:  The loan is classified as a current liability. Entity N has an obligation to settle the amount due under its existing loan with the original bank within the next 12 months, regardless of the fact that it entered into an agreement with another bank which ensures that it will have the necessary funds to repay the original loan.

If Entity N had entered into an agreement before period end to roll the loan into a new loan with the original bank, then FAQ 101.8.2.9 would apply, and the loan would be classified as current or non-current depending on whether Entity N has the intention and discretion to roll over the existing loan.

Classification of contract liabilities

Entity X sells clothing and, with each purchase, customers may earn loyalty points which can be accumulated and redeemed in future for free or discounted merchandise. Each point entitles the customer to a CU 0.10 discount on a future purchase, which may be redeemed at any time by the customer. When a sale is made, Entity X allocates a portion of the transaction price to each of the points, and recognises them as a contract liability as required by IFRS 15.

Entity X has historical data which provides strong support that only 50-55% of the points earned in a given calendar year will be redeemed during the following calendar year. This is because many customers prefer to accumulate their points for a larger purchase.

How does Entity X classify its contract liability relating to the points?

Analysis:  All points are classified as current liabilities because Entity X does not have an unconditional right to defer settlement of the related contract liability for at least 12 months.

Technically, every customer could decide to redeem all of their points within the next 12 months. It is not relevant that Entity X has strong historical evidence that this will not take place, as IAS 1.69(d) is based on the contractual rights and obligations of Entity X and its customers.

Classification of trade payables

Is a trade payable due to be paid more than 12 months after the reporting period classified as a current or non-current liability?

Analysis:  IAS 1.70 states that some liabilities, including trade payables and some accruals for employee and other operating costs, are part of the working capital used in the entity’s normal operating cycle. Therefore, such liabilities are classified as current even if they are due to be settled more than 12 months after the reporting period. This is because the criterion in IAS 1.69(a) is met as the entity ‘expects to settle the liability in its normal operating cycle’. If an entity’s normal operating cycle is not clearly identifiable, IAS 1.70 requires an entity to assume that is 12 months.

Classification of convertible note – compound financial instrument with a European conversion option

Entity A issues a CU1,000 convertible note in return for the same amount of cash consideration. The note has a maturity of three years from its date of issue. The note pays a 10% annual coupon in arrears, and, on maturity, the holder has an option either to receive a cash repayment of CU1,000 or 10,000 of the issuer’s shares (i.e. the conversion feature is a European-style option exercisable only upon maturity). The market interest rate for a note without a conversion feature would have been 12% at the date of issue.

Entity A accounts for the convertible note in accordance with IAS 32 as a compound financial instrument. Entity A recognises a financial liability at the present value of the cash flows using a 12% discount rate, with conversion feature being classified as an equity instrument as it is a derivative that satisfies IAS 32’s ‘fixed for fixed’ test.

How is the liability component classified at the date on which the convertible note is issued?

Analysis:  The liability component is classified as non-current as Entity A has the unconditional right to defer settlement of the liability for three years.

Classification of convertible note – compound financial instrument with an American conversion option

Same fact pattern as FAQ 101.8.2.13, except the conversion feature may be exercised at any time by the holder (i.e. the conversion feature is an American-style option exercisable at any time). Any accrued interest prior to the conversion feature being exercised must be paid by Entity A.

Entity A accounts for the convertible note in the same way as in FAQ 101.8.2.13. This is because the conversion feature still satisfies the ‘fixed for fixed’ test as it results in a fixed amount of cash (the outstanding principal amount of the loan) being converted into a fixed number of shares.

How is the liability component classified?

Analysis:  The liability component is classified as non-current. The holder of the convertible note has the option to settle the liability at any time by exercising the conversion feature, however, IAS 1.69(d) states ‘terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.’ 

Therefore, while the conversion feature may result in the liability being settled at any time in the next three years, it does not result in current classification because it will only result in the liability being settled by the issue of equity instruments. The effect of the conversion feature on the classification of the liability is ignored.

Classification of convertible note – hybrid financial liability

Same fact pattern as FAQ 101.8.2.13, except that the coupon ‘rolls up’ and is added to the amount repayable on maturity of the loan.  However, at any point, the carrying amount of the liability (i.e. unpaid principal and interest) will convert into 10,000 of Entity A’s shares. 

Entity A classifies the convertible note as a hybrid financial instrument. The convertible note contains both a financial liability relating to the obligation to pay cash (i.e. principal and interest) and a derivative financial instrument relating to the conversion feature. The conversion feature is not classified as equity because it fails the ‘fixed for fixed’ test. This is because exercising the conversion feature will result in a variable amount of cash (unpaid principal plus accrued interest, which will vary over the term of the note) being converted into a fixed number of shares. The conversion feature introduces the possibility that the loan may be settled by the exchange of a variable amount of an obligation to pay cash for a fixed number of shares, which is not an equity instrument.

How are the liabilities classified?

Analysis:  Under the current requirements of IAS 1, practice has differed in how the conversion feature affects the classification of the two financial liability components of this hybrid financial instrument.

One approach is to classify both portions as non-current liabilities. This is because IAS 1.69(d) states ( emphasis added ) ‘terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.’  Some have interpreted this to mean that, because the shares that would be issued upon the holder exercising the conversion feature are equity instruments, this settlement feature does not affect the classification of the convertible note. Therefore, both financial liabilities are classified as non-current.

Another approach is to consider that because the conversion feature is classified as a financial liability as a result of failing the ‘fixed for fixed’ test in IAS 32, both components of the convertible note should be classified as current liabilities.

Diversity exists in practice under current IAS 1 requirements. It should be noted that the amendments to IAS 1, which are effective for annual reporting periods beginning on or after 1 January 2023 clarify this requirement. Please see IFRB 2020/01 (available here ) for further information.

IFRIC Agenda Decision - Presentation of payments on non-income taxes

July 2012 - The IFRS Interpretations Committee received a request seeking clarification of whether production-based royalty payments payable to one taxation authority that are claimed as an allowance against taxable profit for the computation of income tax payable to another taxation authority should be presented as an operating expense or a tax expense in the statement of comprehensive income.

As the basis for this request, the submitter assumed that the production-based royalty payments are, in themselves, outside the scope of IAS 12  Income Taxes while the income tax payable to the other taxation authority is within the scope of IAS 12. On the basis of this assumption, the submitter asks the Committee to clarify whether the production-based royalty payments can be viewed as prepayment of the income tax payable. The Committee used the same assumption when discussing the issue.

The Committee observed that the line item of ‘tax expense’ that is required by paragraph 82(d) of  IAS 1  Presentation of Financial Statements is intended to require an entity to present taxes that meet the definition of income taxes under IAS 12. The Committee also noted that it is the basis of calculation determined by the relevant tax rules that determines whether a tax meets the definition of an income tax. Neither the manner of settlement of a tax liability nor the factors relating to recipients of the tax is a determinant of whether an item meets that definition.

The Committee further noted that the production-based royalty payments should not be treated differently from other expenses that are outside the scope of IAS 12, all of which may reduce income tax payable. Accordingly, the Committee observed that it is inappropriate to consider the royalty payments to be prepayment of the income tax payables. Because the production-based royalties are not income taxes, the royalty payments should not be presented as an income tax expense in the statement of comprehensive income.

The Committee considered that, in the light of its analysis of the existing requirements of IAS 1 and IAS 12, an interpretation was not necessary and consequently decided not to add this issue to its agenda.

IFRIC Agenda Decision - Income and expenses arising on financial instruments with a negative yield - presentation in the statement of comprehensive income

January 2015 - The Interpretations Committee discussed the ramifications of the economic phenomenon of negative effective interest rates for the presentation of income and expenses in the statement of comprehensive income.

The Interpretations Committee noted that interest resulting from a negative effective interest rate on a financial asset does not meet the definition of interest revenue in IAS 18  Revenue [IAS 18 has been withdrawn. Paragraph 4.2 of the Conceptual Framework for Financial Reporting contains a definition of income], because it reflects a gross outflow, instead of a gross inflow, of economic benefits. Consequently, the expense arising on a financial asset because of a negative effective interest rate should not be presented as interest revenue, but in an appropriate expense classification. The Interpretations Committee noted that in accordance with paragraphs 85 and 112(c) of IAS 1  Presentation of Financial Statements , the entity is required to present additional information about such an amount if that is relevant to an understanding of the entity’s financial performance or to an understanding of this item.

The Interpretations Committee considered that in the light of the existing IFRS requirements an interpretation was not necessary and consequently decided not to add the issue to its agenda.

IFRIC Agenda Decision - Presentation of interest revenue for particular financial instruments

March 2018 - The Committee received a request about the effect of the consequential amendment that IFRS 9 made to paragraph 82(a) of IAS 1. That consequential amendment requires an entity to present separately, in the profit or loss section of the statement of comprehensive income or in the statement of profit or loss, interest revenue calculated using the effective interest method. The request asked whether that requirement affects the presentation of fair value gains and losses on derivative instruments that are not part of a designated and effective hedging relationship (applying the hedge accounting requirements in IFRS 9 or IAS 39  Financial Instruments: Recognition and Measurement ).

Appendix A to IFRS 9 defines the term ‘effective interest method’ and other related terms. Those interrelated terms pertain to the requirements in IFRS 9 for amortised cost measurement and the expected credit loss impairment model. In relation to financial assets, the Committee observed that the effective interest method is a measurement technique whose purpose is to calculate amortised cost and allocate interest revenue over the relevant time period. The Committee also observed that the expected credit loss impairment model in IFRS 9 is part of, and interlinked with, amortised cost accounting. 

The Committee noted that amortised cost accounting, including interest revenue calculated using the effective interest method and credit losses calculated using the expected credit loss impairment model, is applied only to financial assets that are subsequently measured at amortised cost or fair value through other comprehensive income. In contrast, amortised cost accounting is not applied to financial assets that are subsequently measured at fair value through profit or loss.

Consequently, the Committee concluded that the requirement in paragraph 82(a) of IAS 1 to present separately an interest revenue line item calculated using the effective interest method applies only to those assets that are subsequently measured at amortised cost or fair value through other comprehensive income (subject to any effect of a qualifying hedging relationship applying the hedge accounting requirements in IFRS 9 or IAS 39).

The Committee did not consider any other presentation requirements in IAS 1 or broader matters related to the presentation of other ‘interest’ amounts in the statement of comprehensive income. This is because the consequential amendment that IFRS 9 made to paragraph 82(a) of IAS 1 did not affect those matters. More specifically, the Committee did not consider whether an entity could present other interest amounts in the statement of comprehensive income, in addition to presenting the interest revenue line item required by paragraph 82(a) of IAS 1.

The Committee concluded that the principles and requirements in IFRS Standards provide an adequate basis for an entity to apply paragraph 82(a) of IAS 1 and present separately, in the profit or loss section of the statement of comprehensive income or in the statement of profit or loss, interest revenue calculated using the effective interest method. Consequently, the Committee decided not to add this matter to its standard-setting agenda.

IFRIC Agenda Decision - Actuarial assumptions: discount rate

November 2013 - The Interpretations Committee discussed a request for guidance on the determination of the rate used to discount post-employment benefit obligations. The submitter stated that:

In the light of the points above, the submitter asked the Interpretations Committee whether corporate bonds with a rating lower than ‘AA’ can be considered to be HQCB.

The Interpretations Committee observed that IAS 19 does not specify how to determine the market yields on HQCB, and in particular what grade of bonds should be designated as high quality. The Interpretations Committee considers that an entity should take into account the guidance in paragraphs 84 and 85 of IAS 19 (2011) in determining what corporate bonds can be considered to be HQCB. Paragraphs 84 and 85 of IAS 19 (2011) state that the discount rate:

The Interpretations Committee further noted that ‘high quality’ as used in paragraph 83 of IAS 19 reflects an absolute concept of credit quality and not a concept of credit quality that is relative to a given population of corporate bonds, which would be the case, for example, if the paragraph used the term ‘the highest quality’. Consequently, the Interpretations Committee observed that the concept of high quality should not change over time. Accordingly, a reduction in the number of HQCB should not result in a change to the concept of high quality. The Interpretations Committee does not expect that an entity’s methods and techniques used for determining the discount rate so as to reflect the yields on HQCB will change significantly from period to period. Paragraphs 83 and 86 of IAS 19, respectively, contain requirements if the market in HQCB is no longer deep or if the market remains deep overall, but there is an insufficient number of HQCB beyond a certain maturity.

The Interpretations Committee also noted that:

The Interpretations Committee discussed this issue in several meetings and noted that issuing additional guidance on, or changing the requirements for, the determination of the discount rate would be too broad for it to address in an efficient manner. The Interpretations Committee therefore recommends that this issue should be addressed in the IASB’s research project on discount rates. Consequently, the Interpretations Committee decided not to add this issue to its agenda.

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IAS 1 Presentation of Financial Statements

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IAS 1 sets out overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. It requires an entity to present a complete set of financial statements at least annually, with comparative amounts for the preceding year (including comparative amounts in the notes). A complete set of financial statements comprises:

• a statement of financial position as at the end of the period;
• a statement of profit and loss and other comprehensive income for the period.  Other comprehensive income is those items of income and expense that are not recognised in profit or loss in accordance with IFRS Standards.  IAS 1 allows an entity to present a single combined statement of profit and loss and other comprehensive income or two separate statements;
• a statement of changes in equity for the period;
• a statement of cash flows for the period;
• notes, comprising a summary of significant accounting policies and other explanatory information; and
• a statement of financial position as at the beginning of the preceding comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements.

An entity whose financial statements comply with IFRS Standards must make an explicit and unreserved statement of such compliance in the notes. An entity must not describe financial statements as complying with IFRS Standards unless they comply with all the requirements of the Standards. The application of IFRS Standards, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation. IAS 1 also deals with going concern issues, offsetting and changes in presentation or classification.

Standard history

In April 2001 the International Accounting Standards Board (IASB) adopted IAS 1 Presentation of Financial Statements , which had originally been issued by the International Accounting Standards Committee in September 1997. IAS 1 Presentation of Financial Statements replaced IAS 1 Disclosure of Accounting Policies (issued in 1975), IAS 5 Information to be Disclosed in Financial Statements (originally approved in 1977) and IAS 13 Presentation of Current Assets and Current Liabilities (approved in 1979).

In December 2003 the IASB issued a revised IAS 1 as part of its initial agenda of technical projects. The IASB issued an amended IAS 1 in September 2007, which included an amendment to the presentation of owner changes in equity and comprehensive income and a change in terminology in the titles of financial statements. In June 2011 the IASB amended IAS 1 to improve how items of other income comprehensive income should be presented.

In December 2014 IAS 1 was amended by Disclosure Initiative (Amendments to IAS 1), which addressed concerns expressed about some of the existing presentation and disclosure requirements in IAS 1 and ensured that entities are able to use judgement when applying those requirements. In addition, the amendments clarified the requirements in paragraph 82A of IAS 1.

In October 2018 the IASB issued Definition of Material (Amendments to IAS 1 and IAS 8). This amendment clarified the definition of material and how it should be applied by (a) including in the definition guidance that until now has featured elsewhere in IFRS Standards; (b) improving the explanations accompanying the definition; and (c) ensuring that the definition of material is consistent across all IFRS Standards.

In February 2021 the IASB issued Disclosure of Accounting Policies which amended IAS 1 and IFRS Practice Statement 2 Making Materiality Judgements . The amendment amended IAS 1 to replace the requirement for entities to disclose their significant accounting policies with the requirement to disclose their material accounting policy information.

In October 2022, the IASB issued  Non-current Liabilities with Covenants . The amendments improved the information an entity provides when its right to defer settlement of a liability for at least twelve months is subject to compliance with covenants. The amendments also responded to stakeholders’ concerns about the classification of such a liability as current or non-current.

Other Standards have made minor consequential amendments to IAS 1. They include Improvement to IFRSs (issued April 2009), Improvement to IFRSs (issued May 2010), IFRS 10 Consolidated Financial Statements (issued May 2011), IFRS 12 Disclosures of Interests in Other Entities (issued May 2011), IFRS 13 Fair Value Measurement (issued May 2011), IAS 19 Employee Benefits (issued June 2011), Annual Improvements to IFRSs 2009–2011 Cycle (issued May 2012), IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013), IFRS 15 Revenue from Contracts with Customers (issued May 2014), Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41) (issued June 2014), IFRS 9 Financial Instruments (issued July 2014), IFRS 16 Leases (issued January 2016), Disclosure Initiative (Amendments to IAS 7) (issued January 2016), IFRS 17 Insurance Contracts (issued May 2017), Amendments to References to the Conceptual Framework in IFRS Standards (issued March 2018) and Amendments to IFRS 17 (issued June 2020).

Related active projects

IFRS Accounting Taxonomy Update—Primary Financial Statements

Related completed projects

Clarification of the Requirements for Comparative Information (Amendments to IAS 1)

Classification of Liabilities as Current or Non-current (Amendments to IAS 1)

Definition of Accounting Estimates (Amendments to IAS 8)

Disclosure Initiative (Amendments to IAS 1)

Disclosure Initiative (Amendments to IAS 7)

Disclosure Initiative—Accounting Policies

Disclosure Initiative—Definition of Material (Amendments to IAS 1 and IAS 8)

Disclosure Initiative—Principles of Disclosure

Disclosure Initiative—Targeted Standards-level Review of Disclosures

IFRS Accounting Taxonomy Update—Amendments to IAS 1, IAS 8 and IFRS Practice Statement 2

IFRS Accounting Taxonomy Update—Amendments to IFRS 16 and IAS 1

Joint Financial Statement Presentation (Replacement of IAS 1)

Non-current Liabilities with Covenants (Amendments to IAS 1)

Presentation of Items of Other Comprehensive Income (Amendments to IAS 1)

Presentation of Liabilities or Assets Related to Uncertain Tax Treatments (IAS 1)

Presentation of interest revenue for particular financial instruments (IFRS 9 and IAS 1)

Puttable Financial Instruments and Obligations Arising on Liquidation (Amendments to IAS 32 and IAS 1)

Revised IAS 1 Presentation of Financial Statements: Phase A

Supply Chain Financing Arrangements—Reverse Factoring

Related IFRS Standards

Related ifric interpretations.

IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities

Unconsolidated amendments

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Financial statements (AASB101_07-15_COMPmar20_07-21)

Financial statements, purpose of financial statements.

Financial statements are a structured representation of the financial position and financial performance of an entity. The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. Financial statements also show the results of the management’s stewardship of the resources entrusted to it. To meet this objective, financial statements provide information about an entity’s:

(a)             assets;

(b)             liabilities;

(c)             equity;

(d)             income and expenses, including gains and losses;

(e)             contributions by and distributions to owners in their capacity as owners; and

(f)             cash flows.

This information, along with other information in the notes, assists users of financial statements in predicting the entity’s future cash flows and, in particular, their timing and certainty.

Complete set of financial statements

A complete set of financial statements comprises:

(a)             a statement of financial position as at the end of the period;

(b)             a statement of profit or loss and other comprehensive income for the period;

(c)             a statement of changes in equity for the period;

(d)             a statement of cash flows for the period;

(e)             notes, comprising significant accounting policies and other explanatory information;

(ea)             comparative information in respect of the preceding period as specified in paragraphs 38 and 38A ; and

(f)             a statement of financial position as at the beginning of the preceding period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements in accordance with paragraphs 40A–40D .

An entity may use titles for the statements other than those used in this Standard. For example, an entity may use the title ‘statement of comprehensive income’ instead of ‘statement of profit or loss and other comprehensive income’.

An entity may present a single statement of profit or loss and other comprehensive income, with profit or loss and other comprehensive income presented in two sections. The sections shall be presented together, with the profit or loss section presented first followed directly by the other comprehensive income section. An entity may present the profit or loss section in a separate statement of profit or loss. If so, the separate statement of profit or loss shall immediately precede the statement presenting comprehensive income, which shall begin with profit or loss.

An entity shall present with equal prominence all of the financial statements in a complete set of financial statements.

Many entities present, outside the financial statements, a financial review by management that describes and explains the main features of the entity’s financial performance and financial position, and the principal uncertainties it faces. Such a report may include a review of:

(a)             the main factors and influences determining financial performance, including changes in the environment in which the entity operates, the entity’s response to those changes and their effect, and the entity’s policy for investment to maintain and enhance financial performance, including its dividend policy;

(b)             the entity’s sources of funding and its targeted ratio of liabilities to equity; and

(c)             the entity’s resources not recognised in the statement of financial position in accordance with Australian Accounting Standards.

Many entities also present, outside the financial statements, reports and statements such as environmental reports and value added statements, particularly in industries in which environmental factors are significant and when employees are regarded as an important user group. Reports and statements presented outside financial statements are outside the scope of Australian Accounting Standards.

General features

Fair presentation and compliance with standards.

Financial statements shall present fairly the financial position, financial performance and cash flows of an entity. Fair presentation requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Conceptual Framework for Financial Reporting ( Conceptual Framework ). The application of Australian Accounting Standards, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation.

Notwithstanding paragraph 15 , in respect of AusCF entities, financial statements shall present fairly the financial position, financial performance and cash flows of an entity. Fair presentation requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework . [AusCF2]  The application of Australian Accounting Standards, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation.

An entity whose financial statements comply with IFRSs shall make an explicit and unreserved statement of such compliance in the notes. An entity shall not describe financial statements as complying with IFRSs unless they comply with all the requirements of IFRSs.

Paragraphs AusCF15–AusCF24 contain references to the objective of financial statements set out in the Framework for the Preparation and Presentation of Financial Statements (as identified in AASB 1048 ). In December 2013 the AASB amended the Framework , and thereby replaced the objective of financial statements with the objective of general purpose financial reporting: see Chapter 1 of the Framework .

[Deleted by the AASB]

Not-for-profit entities need not comply with the paragraph 16 requirement to make an explicit and unreserved statement of compliance with IFRSs.

In virtually all circumstances, an entity achieves a fair presentation by compliance with applicable Australian Accounting Standards. A fair presentation also requires an entity:

(a)             to select and apply accounting policies in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors . AASB 108 sets out a hierarchy of authoritative guidance that management considers in the absence of an Australian Accounting Standard that specifically applies to an item.

(b)             to present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information.

(c)             to provide additional disclosures when compliance with the specific requirements in Australian Accounting Standards is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.

An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies used or by notes or explanatory material.

In the extremely rare circumstances in which management concludes that compliance with a requirement in an Australian Accounting Standard would be so misleading that it would conflict with the objective of financial statements set out in the Conceptual Framework , the entity shall depart from that requirement in the manner set out in paragraph 20 if the relevant regulatory framework requires, or otherwise does not prohibit, such a departure.

Notwithstanding paragraph 19 , in respect of AusCF entities, in the extremely rare circumstances in which management concludes that compliance with a requirement in an Australian Accounting Standard would be so misleading that it would conflict with the objective of financial statements set out in the Framework , the entity shall depart from that requirement in the manner set out in paragraph AusCF20 if the relevant regulatory framework requires, or otherwise does not prohibit, such a departure.

In relation to paragraph 19 , the following shall not depart from a requirement in an Australian Accounting Standard:

(a)             entities required to prepare financial reports under Part 2M.3 of the Corporations Act;

(b)             private and public sector not-for-profit entities; and

(c)             entities applying Australian Accounting Standards – Simplified Disclosures.

When an entity departs from a requirement of an Australian Accounting Standard in accordance with paragraph 19 , it shall disclose:

(a)             that management has concluded that the financial statements present fairly the entity’s financial position, financial performance and cash flows;

(b)             that it has complied with applicable Australian Accounting Standards, except that it has departed from a particular requirement to achieve a fair presentation;

(c)             the title of the Australian Accounting Standard from which the entity has departed, the nature of the departure, including the treatment that the Australian Accounting Standard would require, the reason why that treatment would be so misleading in the circumstances that it would conflict with the objective of financial statements set out in the Conceptual Framework , and the treatment adopted; and

(d)             for each period presented, the financial effect of the departure on each item in the financial statements that would have been reported in complying with the requirement.

Notwithstanding paragraph 20 , in respect of AusCF entities, when an entity departs from a requirement of an Australian Accounting Standard in accordance with paragraph AusCF19 , it shall disclose:

(c)             the title of the Australian Accounting Standard from which the entity has departed, the nature of the departure, including the treatment that the Australian Accounting Standard would require, the reason why that treatment would be so misleading in the circumstances that it would conflict with the objective of financial statements set out in the Framework , and the treatment adopted; and

When an entity has departed from a requirement of an Australian Accounting Standard in a prior period, and that departure affects the amounts recognised in the financial statements for the current period, it shall make the disclosures set out in paragraph 20(c) and (d) .

Paragraph 21 applies, for example, when an entity departed in a prior period from a requirement in an Australian Accounting Standard for the measurement of assets or liabilities and that departure affects the measurement of changes in assets and liabilities recognised in the current period’s financial statements.

In the extremely rare circumstances in which management concludes that compliance with a requirement in an Australian Accounting Standard would be so misleading that it would conflict with the objective of financial statements set out in the Conceptual Framework , but the relevant regulatory framework prohibits departure from the requirement, the entity shall, to the maximum extent possible, reduce the perceived misleading aspects of compliance by disclosing:

(a)             the title of the Australian Accounting Standard in question, the nature of the requirement, and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Conceptual Framework ; and

(b)             for each period presented, the adjustments to each item in the financial statements that management has concluded would be necessary to achieve a fair presentation.

Notwithstanding paragraph 23 , in respect of AusCF entities, in the extremely rare circumstances in which management concludes that compliance with a requirement in an Australian Accounting Standard would be so misleading that it would conflict with the objective of financial statements set out in the Framework , but the relevant regulatory framework prohibits departure from the requirement, the entity shall, to the maximum extent possible, reduce the perceived misleading aspects of compliance by disclosing:

(a)             the title of the Australian Accounting Standard in question, the nature of the requirement, and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework ; and

For the purpose of paragraphs 19–23 , an item of information would conflict with the objective of financial statements when it does not represent faithfully the transactions, other events and conditions that it either purports to represent or could reasonably be expected to represent and, consequently, it would be likely to influence economic decisions made by users of financial statements.   When assessing whether complying with a specific requirement in an Australian Accounting Standard would be so misleading that it would conflict with the objective of financial statements set out in the Conceptual Framework , management considers:

(a)             why the objective of financial statements is not achieved in the particular circumstances; and

(b)             how the entity’s circumstances differ from those of other entities that comply with the requirement.   If other entities in similar circumstances comply with the requirement, there is a rebuttable presumption that the entity’s compliance with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Conceptual Framework .

Notwithstanding paragraph 24 , in respect of AusCF entities, for the purpose of paragraphs AusCF19–AusCF23 , an item of information would conflict with the objective of financial statements when it does not represent faithfully the transactions, other events and conditions that it either purports to represent or could reasonably be expected to represent and, consequently, it would be likely to influence economic decisions made by users of financial statements. When assessing whether complying with a specific requirement in an Australian Accounting Standard would be so misleading that it would conflict with the objective of financial statements set out in the Framework , management considers:

(b)             how the entity’s circumstances differ from those of other entities that comply with the requirement.   If other entities in similar circumstances comply with the requirement, there is a rebuttable presumption that the entity’s compliance with the requirement would not be so misleading that it would conflict with the objective of financial statements set out in the Framework .

Going concern

When preparing financial statements, management shall make an assessment of an entity’s ability to continue as a going concern. An entity shall prepare financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, the entity shall disclose those uncertainties. When an entity does not prepare financial statements on a going concern basis, it shall disclose that fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern.

In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period. The degree of consideration depends on the facts in each case. When an entity has a history of profitable operations and ready access to financial resources, the entity may reach a conclusion that the going concern basis of accounting is appropriate without detailed analysis. In other cases, management may need to consider a wide range of factors relating to current and expected profitability, debt repayment schedules and potential sources of replacement financing before it can satisfy itself that the going concern basis is appropriate.

Accrual basis of accounting

An entity shall prepare its financial statements, except for cash flow information, using the accrual basis of accounting.

When the accrual basis of accounting is used, an entity recognises items as assets, liabilities, equity, income and expenses (the elements of financial statements) when they satisfy the definitions and recognition criteria for those elements in the Conceptual Framework .

Notwithstanding paragraph 28 , in respect of AusCF entities, when the accrual basis of accounting is used, an entity recognises items as assets, liabilities, equity, income and expenses (the elements of financial statements) when they satisfy the definitions and recognition criteria for those elements in the Framework . [AusCF3]

The Framework for the Preparation and Presentation of Financial Statements was amended by the AASB in December 2013.

Materiality and aggregation

An entity shall present separately each material class of similar items. An entity shall present separately items of a dissimilar nature or function 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 in the financial statements. If a line item is not individually material, it is aggregated with other items either in those statements or in the notes. An item that is not sufficiently material to warrant separate presentation in those statements may warrant separate presentation in the notes.

When applying this and other Australian Accounting Standards an entity shall decide, taking into consideration all relevant facts and circumstances, how it aggregates information in the financial statements, which include the notes. An entity shall not reduce the understandability of its financial statements by obscuring material information with immaterial information or by aggregating material items that have different natures or functions.

Some Australian Accounting Standards specify information that is required to be included in the financial statements, which include the notes. An entity need not provide a specific disclosure required by an Australian Accounting Standard if the information resulting from that disclosure is not material. This is the case even if the Australian Accounting Standard contains a list of specific requirements or describes them as minimum requirements. An entity shall also consider whether to provide additional disclosures when compliance with the specific requirements in Australian Accounting Standards is insufficient to enable users of financial statements to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.

An entity shall not offset assets and liabilities or income and expenses, unless required or permitted by an Australian Accounting Standard.

An entity reports separately both assets and liabilities, and income and expenses. Offsetting in the statement(s) of profit or loss and other comprehensive income or financial position, except when offsetting reflects the substance of the transaction or other event, detracts from the ability of users both to understand the transactions, other events and conditions that have occurred and to assess the entity’s future cash flows. Measuring assets net of valuation allowances—for example, obsolescence allowances on inventories and doubtful debts allowances on receivables—is not offsetting.

AASB 15 Revenue from Contracts with Customers requires an entity to measure revenue from contracts with customers at the amount of consideration to which the entity expects to be entitled in exchange for transferring promised goods or services. For example, the amount of revenue recognised reflects any trade discounts and volume rebates the entity allows. An entity undertakes, in the course of its ordinary activities, other transactions that do not generate revenue but are incidental to the main revenue-generating activities. An entity presents the results of such transactions, when this presentation reflects the substance of the transaction or other event, by netting any income with related expenses arising on the same transaction. For example:

(a)             an entity presents gains and losses on the disposal of non-current assets, including investments and operating assets, by deducting from the amount of consideration on disposal the carrying amount of the asset and related selling expenses; and

(b)             an entity may net expenditure related to a provision that is recognised in accordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets and reimbursed under a contractual arrangement with a third party (for example, a supplier’s warranty agreement) against the related reimbursement.

In addition, an entity presents on a net basis gains and losses arising from a group of similar transactions, for example, foreign exchange gains and losses or gains and losses arising on financial instruments held for trading. However, an entity presents such gains and losses separately if they are material.

Frequency of reporting

An entity shall present a complete set of financial statements (including comparative information) at least annually. When an entity changes the end of its reporting period and presents financial statements for a period longer or shorter than one year, an entity shall disclose, in addition to the period covered by the financial statements:

(a)             the reason for using a longer or shorter period, and

(b)             the fact that amounts presented in the financial statements are not entirely comparable.

Normally, an entity consistently prepares financial statements for a one-year period. However, for practical reasons, some entities prefer to report, for example, for a 52-week period. This Standard does not preclude this practice.

Comparative information

Except when Australian Accounting Standards permit or require otherwise, an entity shall present comparative information in respect of the preceding period for all amounts reported in the current period’s financial statements. An entity shall include comparative information for narrative and descriptive information if it is relevant to understanding the current period’s financial statements.

An entity shall present, as a minimum, two statements of financial position, two statements of profit or loss and other comprehensive income, two separate statements of profit or loss (if presented), two statements of cash flows and two statements of changes in equity, and related notes.

In some cases, narrative information provided in the financial statements for the preceding period(s) continues to be relevant in the current period. For example, an entity discloses in the current period details of a legal dispute, the outcome of which was uncertain at the end of the preceding period and is yet to be resolved. Users may benefit from the disclosure of information that the uncertainty existed at the end of the preceding period and from the disclosure of information about the steps that have been taken during the period to resolve the uncertainty.

An entity may present comparative information in addition to the minimum comparative financial statements required by Australian Accounting Standards, as long as that information is prepared in accordance with Australian Accounting Standards. This comparative information may consist of one or more statements referred to in paragraph 10 , but need not comprise a complete set of financial statements. When this is the case, the entity shall present related note information for those additional statements.

For example, an entity may present a third statement of profit or loss and other comprehensive income (thereby presenting the current period, the preceding period and one additional comparative period). However, the entity is not required to present a third statement of financial position, a third statement of cash flows or a third statement of changes in equity (ie an additional financial statement comparative). The entity is required to present, in the notes to the financial statements, the comparative information related to that additional statement of profit or loss and other comprehensive income.

An entity shall present a third statement of financial position as at the beginning of the preceding period in addition to the minimum comparative financial statements required in paragraph 38A if:

(a)             it applies an accounting policy retrospectively, makes a retrospective restatement of items in its financial statements or reclassifies items in its financial statements; and

(b)             the retrospective application, retrospective restatement or the reclassification has a material effect on the information in the statement of financial position at the beginning of the preceding period.

In the circumstances described in paragraph 40A , an entity shall present three statements of financial position as at:

(a)             the end of the current period;

(b)             the end of the preceding period; and

(c)             the beginning of the preceding period.

When an entity is required to present an additional statement of financial position in accordance with paragraph 40A , it must disclose the information required by paragraphs 41–44 and AASB 108 . However, it need not present the related notes to the opening statement of financial position as at the beginning of the preceding period.

The date of that opening statement of financial position shall be as at the beginning of the preceding period regardless of whether an entity’s financial statements present comparative information for earlier periods (as permitted in paragraph 38C ).

If an entity changes the presentation or classification of items in its financial statements, it shall reclassify comparative amounts unless reclassification is impracticable. When an entity reclassifies comparative amounts, it shall disclose (including as at the beginning of the preceding period):

(a)             the nature of the reclassification;

(b)             the amount of each item or class of items that is reclassified; and

(c)             the reason for the reclassification.

When it is impracticable to reclassify comparative amounts, an entity shall disclose:

(a)             the reason for not reclassifying the amounts, and

(b)             the nature of the adjustments that would have been made if the amounts had been reclassified.

Enhancing the inter-period comparability of information assists users in making economic decisions, especially by allowing the assessment of trends in financial information for predictive purposes. In some circumstances, it is impracticable to reclassify comparative information for a particular prior period to achieve comparability with the current period. For example, an entity may not have collected data in the prior period(s) in a way that allows reclassification, and it may be impracticable to recreate the information.

AASB 108 sets out the adjustments to comparative information required when an entity changes an accounting policy or corrects an error.

Consistency of presentation

An entity shall retain the presentation and classification of items in the financial statements from one period to the next unless:

(a)             it is apparent, following a significant change in the nature of the entity’s operations or a review of its financial statements, that another presentation or classification would be more appropriate having regard to the criteria for the selection and application of accounting policies in AASB 108 ; or

(b)             an Australian Accounting Standard requires a change in presentation.

For example, a significant acquisition or disposal, or a review of the presentation of the financial statements, might suggest that the financial statements need to be presented differently. An entity changes the presentation of its financial statements only if the changed presentation provides information that is reliable and more relevant to users of the financial statements and the revised structure is likely to continue, so that comparability is not impaired. When making such changes in presentation, an entity reclassifies its comparative information in accordance with paragraphs 41 and 42 .