analyze the presentation and disclosures of the financial statements

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Presentation of Financial Statements (IAS 1)

Last updated: 14 November 2023

IAS 1 serves as the main standard that outlines the general requirements for presenting financial statements. It is applicable to ‘general purpose financial statements’, which are designed to meet the informational needs of users who cannot demand customised reports from an entity. Documents like management commentary or sustainability reports, which are often included in annual reports, fall outside the scope of IFRS, as indicated in IAS 1.13-14. Similarly, financial statements submitted to a court registry are not considered general purpose financial statements (see IAS 1.BC11-13).

The standard primarily focuses on annual financial statements, but its guidelines in IAS 1.15-35 also extend to interim financial reports (IAS 1.4). These guidelines address key elements such as fair presentation, compliance with IFRS, the going concern principle, the accrual basis of accounting, offsetting, materiality, and aggregation. For comprehensive guidance on interim reporting, please refer to IAS 34 .

Note that IAS 1 will be superseded by the upcoming IFRS 18 Presentation and Disclosure in Financial Statements .

Now, let’s explore the general requirements for presenting financial statements in greater detail.

Financial statements

Components of a complete set of financial statements.

Paragraph IAS 1.10 outlines the elements that make up a complete set of financial statements. Companies have the flexibility to use different titles for these documents, but each statement must be presented with equal prominence (IAS 1.11). The terminology used in IAS 1 is tailored for profit-oriented entities. However, not-for-profit organisations or entities without equity (as defined in IAS 32), may use alternative terminology for specific items in their financial statements (IAS 1.5-6).

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Compliance with IFRS

Financial statements must include an explicit and unreserved statement of compliance with IFRS in the accompanying notes. This statement is only valid if the entity adheres to all the requirements of every IFRS standard (IAS 1.16). In many jurisdictions, such as the European Union, laws mandate compliance with a locally adopted version of IFRS.

IAS 1 does consider extremely rare situations where an entity might diverge from a specific IFRS requirement. Such a departure is permissible only if it prevents the presentation of misleading information that would conflict with the objectives of general-purpose financial reporting (IAS 1.20-22). Alternatively, entities can disclose the impact of such a departure in the notes, explaining how the statements would appear if the exception were made (IAS 1.23).

Identification of financial statements

The guidelines for identifying financial statements outlined in IAS 1.49-53 are straightforward and rarely cause issues in practice.

Going concern

The ‘going concern’ principle is a cornerstone of IFRS and other major GAAP. It assumes that an entity will continue to operate for the foreseeable future (at least 12 months). IAS 1 mandates management to assess whether the entity is a ‘going concern’. Should there be any material uncertainties regarding the entity’s future, these must be disclosed (IAS 1.25-26). IFRSs do not provide specific accounting principles for entities that are not going concerns, other than requiring disclosure of the accounting policies used. One of the possible approaches is to measure all assets and liabilities using their liquidation value.

See also this educational material at IFRS.org.

Materiality and aggregation

IAS 1.29-31 emphasise the importance of materiality in preparing user-friendly financial statements. While IFRS mandates numerous disclosures, entities should only include information that is material. This concept should be at the forefront when preparing financial statements, as reminders about materiality are seldom provided in other IFRS standards or publications.

Generally, entities should not offset assets against liabilities or income against expenses unless a specific IFRS standard allows or requires it. IAS 1.32-35 offer guidance on what can and cannot be offset. Offsetting of financial instruments is discussed further in IAS 32 .

Frequency of reporting

Entities are required to present a complete set of financial statements at least annually (IAS 1.36). However, some Public Interest Entities (PIEs) may be obliged to release financial statements more frequently, depending on local regulations. However, these are typically interim financial statements compiled under IAS 34 .

IAS 1 also allows for a 52-week reporting period instead of a calendar year (IAS 1.37). This excerpt from Tesco’s annual report serves to demonstrate this point, showing that the group uses 52-week periods for their financial year, even when some subsidiaries operate on a calendar-year basis:

If an entity changes its reporting period, it must clearly disclose this modification and provide the rationale for the change (IAS 1.36). It is advisable to include an explanatory note with comparative data that aligns with the new reporting period for clarity.

Comparative information

As a general guideline, entities should present comparative data for the prior period alongside all amounts reported for the current period, even when specific guidelines in a given IFRS do not require it. However, there’s no obligation to include narrative or descriptive information about the preceding period if it isn’t pertinent for understanding the current period (IAS 1.38).

If an entity opts to provide comparative data for more than the immediately preceding period, this additional information can be included in selected primary financial statements only. However, these additional comparative periods should also be detailed in the relevant accompanying notes (IAS 1.38C-38D).

IAS 1.40A-46 outlines how to present the statement of financial position when there are changes in accounting policies, retrospective restatements, or reclassifications. This entails producing a ‘third balance sheet’ at the start of the preceding period (which may differ from the earliest comparative period, if more than one is presented). Key points to note are:

• The third balance sheet is required only if there’s a material impact on the opening balance of the preceding period (IAS 1.40A(b)).
• If a third balance sheet is included, there’s no requirement to add a corresponding third column in the notes, although this could be useful where numbers have been altered by the change (IAS 1.40C).
• Interim financial statements do not require a third balance sheet (IAS 1.BC33).

IAS 8 also requires comprehensive disclosures concerning changes in accounting policies and corrections of errors .

Statement of financial position

IAS 1.54 enumerates the line items that must, at a minimum, appear in the statement of financial position. Entities should note that separate lines are not required for immaterial items (IAS 1.31). Additional line items can be added for entity-specific or industry-specific matters. IAS 1 permits the inclusion of subtotals, provided the criteria set out in IAS 1.55A are met.

Additional disclosure requirements are set out in IAS 1.77-80A. Of particular interest are the requirements pertaining to equity (IAS 1.79), which begin with the number of shares and extend to include details such as ‘rights, preferences, and restrictions relating to share capital, including restrictions on the distribution of dividends and the repayment of capital.’ While these kinds of limitations are common across various legal jurisdictions (for example, not all retained earnings can be distributed as dividends), many companies neglect to disclose such limitations in their financial statements.

For guidance on classifying assets and liabilities as either current or non-current, please refer to the separate page dedicated to this topic.

Statement of profit or loss and other comprehensive income

IAS 1 provides two methods for presenting profit or loss (P/L) and other comprehensive income (OCI). Entities can either combine both P/L and OCI into a single statement or present them in separate statements (IAS 1.81A-B). Additionally, the P/L and total comprehensive income for a given period should be allocated between the owners of the parent company and non-controlling interests (IAS 1.81B).

Minimum contents in P/L and OCI

IAS 1.82-82A specifies the minimum items that must appear in the P/L and OCI statements. These items are required only if they materially impact the financial statements (IAS 1.31).

Entities are permitted to add subtotals to the P/L statement if they meet the criteria specified in IAS 1.85A. Operating income is often the most commonly used subtotal in P/L. This practice may be attributed to the 1997 version of IAS 1, which mandated the inclusion of this subtotal—although this is no longer the case. IAS 1.BC56 clarifies that an operating profit subtotal should not exclude items commonly considered operational, such as inventory write-downs, restructuring costs, or depreciation/amortisation expenses.

Profit or loss (P/L)

All items of income and expense must be recognised in P/L (or OCI). This means that no income or expenses should be recognised directly in the statement of changes in equity, unless another IFRS specifically mandates it (IAS 1.88). Direct recognition in equity may also result from intra-group transactions . IAS 1.97-98 require separate disclosure of material items of income and expense, either directly in the income statement or in the notes.

Expenses in P/L can be presented in one of two ways (IAS 1.99-105):

• By their nature (e.g., depreciation, employee benefits); or
• By their function within the entity (e.g., cost of sales, distribution costs, administrative expenses).

When opting for the latter, entities must provide additional details on the nature of the expenses in the accompanying notes (IAS 1.104).

Other comprehensive income (OCI)

OCI encompasses income and expenses that other IFRS specifically exclude from P/L. There is no conceptual basis for deciding which items should appear in OCI rather than in P/L. Most companies present P/L and OCI as separate statements, partly because OCI is generally overlooked by investors and those outside of accounting and financial reporting circles. The concern is that combining the two could reduce net profit to merely a subtotal within total comprehensive income.

All elements that constitute OCI are specifically outlined in IAS 1.7, as part of its definitions.

Reclassification adjustments

A reclassification adjustment refers to the amount reclassified to P/L in the current period that was recognised in OCI in the current or previous periods (IAS 1.7). All items in OCI must be grouped into one of two categories: those that will or will not be subsequently reclassified to P/L (IAS 1.82A). Reclassification adjustments must be disclosed either within the OCI statement or in the accompanying notes (IAS 1.92-96).

To illustrate, foreign exchange differences arising on translation of foreign operations and gains or losses from certain cash flow hedges are examples of items that will be reclassified to P/L. In contrast, remeasurement gains and losses on defined benefit employee plans or revaluation gains on properties will not be reclassified to P/L.

The practice of transferring items from OCI to P/L, commonly known as ‘recycling’, lacks a concrete conceptual basis and the criteria for allowing such transfers in IFRS are often considered arbitrary.

Tax effects

OCI items can be presented either net of tax effects or before tax, with the overall tax impact disclosed separately. In either case, entities must specify the tax amount related to each item in OCI, including any reclassification adjustments (IAS 1.90-91). Interestingly, there is no such requirement to disclose tax effects for individual items in the income statement.

Statement of changes in equity

IAS 1.106 outlines the minimum line items that must be included in the statement of changes in equity. Subsequent paragraphs specify the disclosure requirements, which can be addressed either within the statement itself or in the accompanying notes. It’s crucial to note that changes in equity during a reporting period can arise either from income and expense items or from transactions involving owners acting in their capacity as owners (IAS 1.109). This means that entities cannot adjust equity directly based on changes in assets or liabilities unless these adjustments result from transactions with owners, such as capital contributions or dividend payments, or are otherwise mandated by other IFRSs.

Statement of cash flows

The statement of cash flows is governed by IAS 7 .

• Explanatory notes

Structure of explanatory notes

The structure for explanatory notes is detailed in IAS 1.112-116. In practice, there are several commonly adopted approaches to organising these notes:

Approach #1:

• Primary financial statements (P/L, OCI, etc.)
• Statement of compliance and basis of preparation
• Accounting policies

Approach #1 is logically coherent, as understanding accounting policies is crucial before delving into the financial data. However, in reality, few people read the accounting policies in their entirety. Consequently, users often have to navigate past several pages of accounting policies to reach the explanatory notes.

Approach #2:

• Primary financial statements (P/L, OCI, etc)

In Approach #2, accounting policies are treated as an appendix and positioned at the end of the financial statements. The advantage here is that all numerical data is clustered together, uninterrupted by extensive descriptions of accounting policies.

Approach #3:

• Explanatory notes integrated with relevant accounting policies

Approach #3 pairs accounting policies directly with the associated explanatory notes. For example, accounting policies relating to inventory would appear alongside the explanatory note that breaks down inventory components.

Management of capital

IAS 1.134-136 outline the disclosures related to capital management. These provisions apply to all entities, whether or not they are subject to external capital requirements. An important note here is that entities are not obligated to disclose specific values or ratios concerning capital objectives or requirements.

IAS 1.137 mandates disclosure of dividends proposed or declared before the financial statements were authorised for issue but not recognised as a distribution to owners during the period. Furthermore, entities are required to disclose the amount of any cumulative preference dividends not recognised.

Disclosure of accounting policies

IAS 1 specifies the requirements for disclosing accounting policy information which are discussed here .

Disclosing judgements and sources of estimation uncertainty

IAS 1 mandates disclosing judgements and sources of estimation uncertainty .

Other disclosures

Additional miscellaneous disclosure requirements are detailed in paragraphs IAS 1.138.

IFRS 18 Presentation and Disclosure in Financial Statements

The upcoming IFRS 18 Presentation and Disclosure in Financial Statements , which will supersede IAS 1, aims to enhance the comparability and transparency of financial reporting, focusing on the statement of profit or loss. Key changes include:

• The introduction of two new subtotals in the P/L statement: ‘operating profit’ and ‘profit before financing and income taxes’.
• A requirement for the reconciliation of management-defined performance measures (also known as ‘non-GAAP’ measures) with those specified by IFRS.
• Refined guidelines for the aggregation and disaggregation of information within the primary financial statements.
• Limited changes to the statement of cash flows, establishing operating profit as a starting point for the indirect method and eliminating options for the classification of interest and dividend cash flows.

Learn more in this BDO’s publication .

The release of IFRS 18 is expected in Q2 2024. This new IFRS will be effective from 1 January 2027 with early application permitted.

© 2018-2024 Marek Muc

The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Excerpts from IFRS Standards come from the Official Journal of the European Union (© European Union, https://eur-lex.europa.eu). You can access full versions of IFRS Standards at shop.ifrs.org. IFRScommunity.com is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org.

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• IFRS and Corporate Reporting

IASB publishes IFRS 18 Presentation and Disclosure in Financial Statements

• Required categories and sub-totals in the statement of profit or loss: items of income and expense will be classified into operating, financing, investing, income tax or discontinued operations categories. This classification will depend on a combination of an assessment of the entity’s main business activities and certain accounting policy choices.
• Required sub-totals in the statement of profit or loss: based on an entity’s application of the classification requirements as described in #1, certain sub-totals will be required to be presented in financial statements, such as operating profit. The operating profit sub-total is now defined in IFRS 18.
• Labelling, aggregation and disaggregation: expanded requirements for labelling, aggregation and disaggregation of information in financial statements.
• Narrow scope changes to the statement of cash flows: revised requirements for how the statement of cash flow will be presented, including the classification of interest and dividend cash flows.
• Management-defined performance measures: the requirement for certain entities to include ‘management-defined performance measures’ (i.e. alternative performance measures, ‘non-GAAP measures’, etc.) in their financial statement notes, with reconciliations to the nearest IFRS-compliant sub-total. For example, ‘adjusted profit or loss’ reconciled to profit or loss.

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Accounting 101: The structure, content and other disclosures in the financial statements

In our previous article Considerations for the presentation of financial statements in the Accounting 101 series, we explained that the IAS 1 Presentation of Financial Statements covers various components and principles in the preparation of the financial statements. In that article, we have shared with you the first two components covered in IAS 1 – a complete set of financial statements and the general features of financial statements.

This round, we explain the remaining topics which are the structure and content of financial statements and other disclosures as required by IAS 1. With this, readers will be able to appreciate what are the minimum information that entities must disclose in the financial statements. Additionally, we also touch on the factors that entities should consider in structuring and presenting their financial statements. 

What  are the required structure and content of the financial statements?

IAS 1 discusses few areas in relation to the structure and content of the financial statements. They are:

• the identification of the financial statements;
• the statement of financial position;
• the statement of profit or loss and other comprehensive income;
• the statement of changes in equity;
• the statement of cash flows; and
• the notes to the financial statements.

Let’s now look at the requirements above.

1. Identification of the financial statements

IAS 1 requires an entity to display display the following information clearly. It includes to repeat them if it necessary for the users to identify the entity’s financial statements:

• Name of the reporting entity – If an entity changed its name since the previous reporting period, it must disclose the fact. In practice, you will see the new name displayed together with the old name (labelled as ‘formerly known’). 
• Separate or group financial statements – Entities may prepare separate or group financial statements. When an entity prepares both separate and group financial statements, the financial statements and corresponding financial information are clearly labelled as ‘company’ or ‘group’. 
• The reporting period – Entities must disclose the date of the end of the reporting period or period covered by the financial statements.
• The currency – IAS 1 also requires an entity to disclose the presentation currency used in the preparation of the financial statements.
• The level of rounding – An entity must also disclose the level of rounding used in presenting the amounts in the financial statements if this is the case. 

2. Statement of Financial Position

Paragraph 54 of IAS 1 provides a long list of line items that an entity must present in the statement of financial position. An entity presents them if they are material. These line items are generally items that are sufficiently different in nature or function. Hence, warrant a line item on its own. Nevertheless, an entity needs to assess whether presentation of an additional line item is necessary based on the following:

• Nature and liquidity of the assets;
• Function of assets within the entity; and
• Amount, nature and timing of liabilities. 

IAS 1 also allows for an entity to present subtotals, so long that they are relevant to the users’ understanding. 

Presentation of current and non-current classification

Entities need to present their statement of financial position based on current and non-current classification. This means, in the statement of financial position, entities present current and non-current assets and current and non-current liabilities.

There is however, an exception to this. It is when a presentation based on liquidity provides information that is more relevant and reliable. The financial statements of entities in the financial services industry such as commercial banks, investment banks and insurance entities are generally prepared based on this basis. Nevertheless, regardless of the presentation choice, entities will need to disclose the amount expected to be recovered or settled after more than 12 months for each asset and liability line item that combines amount expected to be recovered or settled:

• No more than 12 months after the reporting period; and
• More than 12 months after the reporting period.

IAS 1 also provides guidance on classifying assets and liabilities as current or non-current. We have explained in Liability and equity on the current and non-current classification of liabilities.

Current and non-current classification for assets

IAS 1 states that an asset is classified as current when an entity:

• expects to realise the asset, or intends to sell or consume it in its normal operating cycle;
• holds the asset primarily for the purpose of trading;
• expects to realise the asset within twelve months after the reporting period; or
• the asset is cash or cash equivalent unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. 

Entities classify an asset that does not meet any of the above as non-current. This principle, however, does not apply to deferred tax assets and liabilities. Deferred tax assets and liabilities are classified as non-current in the statement of financial position. 

3. Statement of Profit or Loss and Other Comprehensive Income

Entities present a statement of profit or loss and other comprehensive income either as a single statement (i.e., statement of comprehensive income) or as a two-separate statement.

In a single statement, there will be two sections which are the profit or loss section followed directly by the other comprehensive income section. Total comprehensive income will be the total of the two sections. In contrast, in the two-separate statement, entities segregate the statement of profit or loss from the statement of comprehensive income.

Let’s see examples for you to compare the two approaches:

• Manforce Group Berhad’s audited financial statement for the financial year ended 30 September 2020

• Bursa Malaysia Berhad’s audited financial statements for the financial year ended 31 December 2019

IAS 1 again stipulates line items that entities need present in the statement of profit or loss or profit or loss section (under single-statement approach), if they are material. Additionally, for items in the other comprehensive income, IAS 1 requires entities to further segregate them into items that will not be reclassified and items that will be reclassified to profit or loss. 

Entities present items in the statement of profit or loss or the profit or loss section based on either their nature or function. Either presentation based on nature or function, the selection made must be based on providing more relevant and reliable information to the users.  

4. Statement of Changes in Equity

IAS 1 emphasises that entities must include the following information in the statement of changes in equity:

• The separation of total amounts attributable to owners and non-controlling interest in relation to the total comprehensive income for the period;
• Effect of retrospective application or restatement on each component of equity; and
• A reconciliation between the beginning amount and the closing amount for each component of equity.

IAS 1 additionally provides some other requirements on information that entities must present in the statement of changes in equity or in the notes to the financial statements.

5. Statement of Cash Flows

IAS 1 does not provide any explicit requirements with regard to the statement of cash flows. This is because there is a specific or separate standard on its own that governs the requirement for the statement of cash flows. IAS 1 makes reference to IAS 7 Statement of Cash Flows for the presentation and disclosure of cash flow information.

Notes to the financial statements

The following are general principles on information that an entity needs to present and disclose in the notes to the financial statements:

• information on the basis of preparation of the financial statements and specific accounting policies used or adopted by the entities;
• disclosures of information required by IFRS that are not presented elsewhere in the financial statements; and
• to provide information that is relevant to users’ understanding but not presented elsewhere in the financial statements.

Other important information that an entity needs to disclose are:

• The significant judgments – These are judgments that entities have made in the process of applying the entities’ accounting policies. The significant judgment made are those that have the most significant effect on the amounts recognised in the financial statements.
• The significant assumptions – These are assumptions that entities made about the future and other major sources of estimation uncertainty at the end of the reporting period. The assumptions and estimation uncertainty should have a significant risk of resulting in material adjustments to the numbers of assets and liabilities reported in the financial statements within the next financial year. 
• Capital management – Disclosure on the capital management covers the objective, policies and processes for managing capital. It also include whether an entity complies or has not complied with any externally imposed capital requirement and the consequence if not comply. 

Future development on the structure and content of the financial statements: What’s next?

It is also interesting to bring to your attention that the International Accounting Standards Board (“IASB”) has embarked into the Better Communication in Financial Reporting project with few project themes. The project aims to make financial information more useful and improve the way entities communicate financial information to the users.

IASB issued an exposure draft on General Presentation and Disclosures back in December 2019. It proposed changes or amendments to the requirements about the information on the performance of the profit or loss. Additionally, it also proposed some limited changes to the statement of cash flows and the statement of financial position. At this juncture, IASB is still deliberating the comments received from the public and future direction on the project.

The discussion on the general presentation, structure and content of financial statements in our Accounting 101 series remain relevant until the IASB finalises any amendments to the existing requirements. We will keep you posted on future development in this area. Till then. Stay tuned!

Editorial Team @THEACCSENSE More by THEACCSENSE

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The International Accounting Standards Board (IASB) today completed its work to improve the usefulness of information presented and disclosed in financial statements. The new Standard, IFRS 18 Presentation and Disclosure in Financial Statements , will give investors more transparent and comparable information about companies’ financial performance, thereby enabling better investment decisions. It will affect all companies using IFRS Accounting Standards.

IFRS 18 introduces three sets of new requirements to improve companies’ reporting of financial performance and give investors a better basis for analysing and comparing companies:

Improved comparability in the statement of profit or loss (income statement)

Currently there is no specified structure for the income statement. Companies choose their own subtotals to include. Often companies report an operating profit but the way operating profit is calculated varies from company to company, reducing comparability. 1

IFRS 18 introduces three defined categories for income and expenses—operating, investing and financing—to improve the structure of the income statement, and requires all companies to provide new defined subtotals, including operating profit. The improved structure and new subtotals will give investors a consistent starting point for analysing companies’ performance and make it easier to compare companies.

Enhanced transparency of management-defined performance measures

Many companies provide company-specific measures, often referred to as alternative performance measures. Investors find this information useful. However, most companies don’t currently provide enough information to enable investors to understand how these measures are calculated and how they relate to the required measures in the income statement.

IFRS 18 therefore requires companies to disclose explanations of those company-specific measures that are related to the income statement, referred to as management-defined performance measures. The new requirements will improve the discipline and transparency of management-defined performance measures, and make them subject to audit.

More useful grouping of information in the financial statements

Investor analysis of companies’ performance is hampered if the information provided by companies is too summarised or too detailed. IFRS 18 sets out enhanced guidance on how to organise information and whether to provide it in the primary financial statements 2 or in the notes. The changes are expected to provide more detailed and useful information. IFRS 18 also requires companies to provide more transparency about operating expenses, helping investors to find and understand the information they need.

Andreas Barckow, IASB Chair, said:

IFRS 18 represents the most significant change to companies’ presentation of financial performance since IFRS Accounting Standards were introduced more than 20 years ago. It will give investors better information about companies’ financial performance and consistent anchor points for their analysis.

IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, but companies can apply it earlier. Changes in companies’ reporting resulting from IFRS 18 will depend on their current reporting practices and IT systems.

IFRS 18 replaces IAS 1 Presentation of Financial Statements . It carries forward many requirements from IAS 1 unchanged. IFRS 18 is the culmination of the IASB’s Primary Financial Statements project. 

Access the Standard

IFRS 18, the Illustrative Examples and the Basis for Conclusions are available to IFRS Digital subscribers. You can purchase an IFRS Digital Subscription or a PDF version of the Standard from our web shop.

• IFRS 18  Presentation and Disclosure in Financial Statements
• Basis for Conclusions —explanation of the IASB’s considerations in developing the requirements in IFRS 18
• Illustrative Examples —worked examples for aspects of IFRS 18, including flowcharts relating to key requirements in IFRS 18

Access the supporting materials

Support to implement IFRS 18 will be available via the IFRS 18 implementation webpage .

The following documents, along with IFRS 18, are available from the completed project page :

• Short video of IASB Chair Andreas Barckow summarising the new requirements
• One-page quick view of IFRS 18
• Project Summary —overview of the project in non-technical language
• Effects Analysis —description of the likely benefits and costs of IFRS 18
• Feedback Statement —summary of feedback on proposals and the IASB’s response to feedback
• Reference materials —comparison table of requirements in IAS 1 and IFRS 18 showing changes to each paragraph of IAS 1

Watch Andreas Barckow explain the new requirements to improve companies’ financial performance reporting.

1 An IASB study of 100 companies showed that over 60 reported a figure for operating profit, using at least nine different ways to calculate it.

2 The primary financial statements consist of the statement of profit or loss (income statement); statement presenting comprehensive income; statement of financial position (balance sheet); statement of changes in equity; and statement of cash flows.

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In recent years, the International Auditing and Assurance Standards Board (IAASB) has considered the issue of auditing disclosures in financial statements, prompted by a number of factors including developments in IFRS requirements and the increased level of complexity and subjectivity involved in the preparation of information to be disclosed in financial statements. This article examines this issue, and reminds candidates to review the examinable documents list for guidance.

Disclosures in financial statements

Auditors are required to express an opinion on the financial statements as a whole. This includes the notes to the financial statements which are an integral part of the accounts, providing additional information on balances and transactions and other relevant information. Therefore, it is important that during all stages of the audit the auditor gives appropriate consideration to, and plans to obtain sufficient and appropriate audit evidence in relation to the disclosures made in the notes to the financial statements.

ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing specifies that the financial statements include related notes which ‘comprise a summary of the significant accounting policies and other explanatory information’.

The notes to financial statements contain different types of information, some quantitative and some qualitative, as required by IFRS. Some examples are given below:

Quantitative disclosures:

• Disaggregation and analysis of balances and transactions included in the financial statements, for example of property, plant and equipment, intangible assets, provisions, lease obligations, financial instruments.
• Segmental analysis of revenue, profit and certain other items, and information about major customers (for listed companies).
• Summarised financial information in relation to associates and joint ventures.

Qualitative disclosures:

• Descriptions of significant accounting policies and areas where critical accounting judgement has been exercised, and rationale for any changes in accounting policies.
• Confirmation that the going concern assumption is appropriate, or discussion of significant doubt over going concern.
• Information on related parties, and related party transactions.
• Explanation of impairment losses recognised in the year.
• Discussion of areas of risk, for example those relating to financial instruments.

A key driver for the IAASB’s consultation and the exposure draft, Addressing Disclosures in the Audit of Financial Statements , issued in May 2014, is that in recent years, IFRS requirements in relation to disclosures in the notes to financial statements have become more onerous. The exposure draft states that ‘over the past decade, financial reporting disclosure requirements and practices have evolved. They now provide more extensive decision-useful information that is more detailed and often deals with matters that are subjective such as assumptions, models, alternative measurement bases and sources of estimation uncertainty. As these financial reporting disclosures continue to evolve, challenges have arisen for preparers and auditors in addressing new types of quantitative and non-quantitative information’.

The challenges for auditors

Risk of irrelevant disclosures and determining materiality.

The IAASB is concerned that in some financial statements excessive disclosure is being provided, sometimes of immaterial matters that do not need to be disclosed. This makes it difficult for the reader of the financial statements to focus on the important matters due to the ‘information overload’. This is a difficult area for the auditor because often judgement is needed to decide whether or not a matter should be disclosed. Companies might prefer to provide too much information rather than too little, in the aim of full transparency, but end up providing irrelevant or unnecessary disclosures which obscure the rest of the information included.

Linked to the point above, it can be very difficult to apply materiality to disclosures, especially those of a quantitative nature. The IAASB has considered whether additional guidance should be given to auditors to help them to determine whether qualitative disclosures are material or not by making a preliminary determination at the planning stage of the audit of those disclosures that could reasonably be expected to influence the economic decisions of users. This would help the auditor to better identify disclosures material by their nature or their monetary value, and to plan appropriate audit procedures.  

Sources of information

A key concern of the IAASB is that the information included in the notes to the financial statements, whether quantitative or qualitative in nature is derived from systems and processes that are not part of the general ledger system. Examples could include, forward looking statements, descriptions of models used in fair value measurements, descriptions of risk exposures and other narrative disclosures. This gives rise to several potential problems to the auditor, and respondents involved in the IAASB’s consultations noted that this issue poses some of the most challenging aspects of preparing and auditing disclosures.

One problem is whether the system or process from which information is derived, when it is outside of normal accounting processes, has any internal control to provide assurance on the completeness, accuracy and validity of the information. For example, information on financial instruments may be provided by a company’s treasury management function, which could have very different systems and procedures to the accounting function, with a different level of control risk attached. The systems and controls may be deficient, creating higher audit risk. This may particularly be the case when dealing with one-off disclosures, for example in relation to the situation causing an impairment loss. In some cases, due to lack of the documentation that would normally be expected for more routine transactions or events captured by the accounting system, it may be difficult to obtain sufficient, appropriate audit evidence on disclosures.  

Timing considerations

The IAASB notes that often disclosures are prepared by management very late in the audit process. Often, when the auditor is planning the audit, draft disclosures are not available, so it is not possible for the auditor to plan the audit of disclosures until much later in the audit process. This could lead to higher audit risk in that there may not be much time to assess the risk relating to disclosures and to perform the necessary audit procedures. This is especially the case where disclosures are complex, for example in relation to financial instruments, or subjective, for example in relation to fair value measurement.

The IAASB proposals

The IAASB has proposed additional guidance to help establish an appropriate focus on disclosures in the audit and encourage earlier auditor attention on them during the audit process. There is also a proposal to amend the definition of financial statements contained in the ISAs, to ensure an appropriate emphasis on the importance of disclosures as part of the financial statements.

Proposed changes to the ISAs include new application material to:

• Amend the term ‘financial statements’ as used in the ISAs to include all disclosures subject to audit and to include that such disclosures may be found in the related notes, on the face of the financial statements, or incorporated by cross-reference as allowable by some financial reporting frameworks.
• Emphasise the importance of giving appropriate attention to, and planning adequate time for addressing disclosures in the same way as classes of transactions, events and account balances, and early consideration of matters such as significant new or revised disclosures.
• Focus auditors on additional matters relating to disclosures that may be discussed with those charged with governance, in particular at the planning stage of the audit.
• Emphasise that, when agreeing the terms of engagement, the auditor should emphasise management’s responsibility, early in the audit process, to make available information relevant to disclosures.
• Provide additional examples of misstatements in disclosures to highlight the types of misstatements that may be found in disclosures, and to clarify that identified misstatements, including those in disclosures and irrespective of whether they occur in quantitative or non-quantitative information, need to be accumulated and evaluated for their effect on the financial statements.

In terms of specific planning considerations, the IAASB recommends improvements to some aspects of risk assessment and materiality determination in order to encourage a more robust risk assessment relating to disclosures:

• Expanding the guidance on matters to consider when the auditor is obtaining an understanding of the entity and its environment, including the entity’s internal control, and assessing the risks of material misstatement for disclosures, including materiality considerations for non-quantitative disclosures.
• Highlighting disclosures, including examples of relevant matters, for consideration during the discussion among the engagement team of the susceptibility of the entity’s financial statements to material misstatement, including from fraud.
• Integrating the separate category for assertions relating to presentation and disclosure into the categories for account balances and transactions to promote their more consistent and effective use.
• Acknowledging, and giving prominence to, disclosures where the information is not derived from the accounting system, and related considerations pertaining to this source of audit evidence.
• In relation to materiality, clarifying that the nature of potential misstatements in disclosures, in particular non-quantitative disclosures, is also relevant to the design of audit procedures to address the risks of material misstatement.

The IAASB has acknowledged that while disclosures have an increased prominence in financial statements, the audit of disclosures is difficult for a number of reasons. Through a process of public consultation, the IAASB has proposed additional guidance in this area, which should provide auditors with practical guidance and serve to reduce audit risk.

Written by a member of the P7 examining team

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Islamic Sustainable Finance, Law and Innovation pp 473–482 Cite as

The Presentation and Disclosure of Islamic Banks’ Financial Statements: A Comparative Analysis of IFRS and AAOIFI Financial Accounting Standards

• Pazilaiti Ababaike 3 ,
• Romzie Rosman 3 &
• Ashurov Sharofiddin 3  
• First Online: 27 July 2023

143 Accesses

Part of the book series: Contributions to Management Science ((MANAGEMENT SC.))

Financial reporting is a formal recording of transaction and activities of a financial entity. The demand for standards in financial reporting started way back before introducing the Malaysian Accounting Standards Board (MASB). A comparative analysis of the presentation and disclosure of Islamic banks’ financial statement based on IFRS and AAOIFI financial accounting standard (FAS) is essential in explaining Islamic banks’ reporting and compliance. Therefore, this study was conducted to compare the two accounting standards and their effectiveness in different Islamic banks. A critical literature review showed the origin and different opinions of several studies about IFRS and AAOIFI FAS. This study adopts semi-structured interview which has been conducted with industry practitioners and academicians to investigate the underlying issues in general on the different reporting based on the two standards, particularly on the reporting and disclosure of the profit-sharing investment accounts. The results show that IFRS focuses on reporting the economic substance of transactions, while the AAOIFI focuses on ensuring the IFIs regulations adhere to Shariah laws. The AAOIFI has been unwelcoming to two concepts in the IFRS, the time value of money and substance over form.

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Pazilaiti Ababaike, Romzie Rosman & Ashurov Sharofiddin

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Ababaike, P., Rosman, R., Sharofiddin, A. (2023). The Presentation and Disclosure of Islamic Banks’ Financial Statements: A Comparative Analysis of IFRS and AAOIFI Financial Accounting Standards. In: Mansour, N., Bujosa Vadell, L.M. (eds) Islamic Sustainable Finance, Law and Innovation. Contributions to Management Science. Springer, Cham. https://doi.org/10.1007/978-3-031-27860-0_43

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Presentations and Disclosures Relating to Inventories

Presentation and Disclosures Relating to Inventories

Under IFRS, the following financial statement disclosures concerning inventories are required:

• the accounting policies that were adopted in measuring inventories, including the cost formula used;
• the total carrying amount of inventories and the carrying amount in classifications that are appropriate to the entity;
• the carrying amount of inventories that are carried at fair value less the costs to sell;
• the amount of inventories that are recognized as an expense during the reporting period;
• the amount of any write-down of inventories that are recognized as an expense in the reporting period;
• the amount of any reversal of any write-down that is recognized as a reduction in the cost of sales during the reporting period;
• the circumstances or events which have led to the reversal of a write-down of inventories; and
• the carrying amount of inventories that are pledged as security for liabilities.

The inventory-related disclosures under US GAAP are quite similar to those under IFRS. However, the second and third requirements from the bottom of the above list are irrelevant since US GAAP prohibits the reversal of prior-year inventory write-downs. In addition, US GAAP requires disclosing significant estimates applicable to inventories and any material amount of income resulting from liquidating LIFO inventory.

Issues analysts should consider

Financial statement analyses that fail to consider the impact of differences in methodologies adopted, disclosures made, and presentation formats are likely to result in faulty conclusions.

An analyst has to have a critical mind and consider the information at their disposal that supports the financial statements that have been presented. Information on a company’s inventory disclosures is no exception.

Considerations Relating to Inventory Disclosures

Analysts must recognize that a company’s choice of inventory valuation method can have a significant impact on the presentation of its financial statements. Therefore, financial items such as cost of sales, gross profit, net income, inventories, current assets, and total assets will be impacted.

The financial ratios, which contain items such as the current ratio, return on assets, gross profit margin, and inventory turnover, will also be impacted. The current ratio is impacted because inventory is a component of current assets. On the other hand, the return on assets ratio is impacted because the cost of sales is a key component in deriving net income, and inventory is a component of total assets.

The financial statement items and ratios may also be impacted by the adjustment of inventory carrying amount to net realizable value or current replacement cost.

Analysts must, therefore, carefully consider inventory valuation method differences when evaluating a company’s financial performance over time. Especially they must do so when comparing a company’s performance with the performance of its peers or industry as a whole.

To better use the inventory disclosure information, an analyst needs to get a better understanding of the following:

• the right size for the company’s inventory;
• the percentage change of the categories composing the inventory;
• the growth rate of inventory compared to the growth rate of sales, and
• other sources of information.

Inventory Size

If a company’s inventory is too small, it might miss selling opportunities. A company investing too much in its inventory would negatively affect most financial ratios. To determine whether a company’s inventory has the right size, an analyst needs to compare the company’s inventory turnover ratio with the trend of the company’s sales.

Inventory Composing Category

The percentage change of categories composing the inventory could signal a company’s management’s expectations about future demand for the company’s products. The percentage increase of “finished goods” and “work-in-progress” indicates an expectation of high demand for a company’s products. On the other hand, if “finished goods” increase – in terms of percentage – it might indicate a slower growth of sales in the future.

Inventory Growth Rate Relative to Sales

An analyst needs to compare the growth rate of a company’s “finished goods” and its sales growth rate. If they move in tandem, it could indicate steady sales growth trends. If either outpaces the other, it might indicate that the sales growth rate would either reverse or slow down.

Other Sources of Information

Analysts should also consider additional information about a company’s inventory and future sales, which may be found in other sources such as the Management, Discussion, and Analysis (MD&A). Alternatively, an analyst could seek more information on a company in similar sections of the company’s financial reports, industry-related news, publications, and industry economic data.

Question 1 Which of the following financial statement items is not directly affected by the choice of inventory valuation method? Revenue. Net income. Cost of sales. Solution The correct answer is A. Revenue is not affected by the choice of inventory valuation method. Net income and cost of sales, on the other hand, are. Question 2 The financial disclosure information required by the IFRS, but not US GAAP, is: Information related to inventory write-downs. Information related to inventory write-down reversals. Information related to the carrying amount of each inventory section. Solution The correct answer is B. US GAAP does not require the disclosure of write-down reversals because it does not allow for the reversal of write-downs.

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The International Accounting Standards Board (IASB) today completed its work to improve the usefulness of information presented and disclosed in financial statements. The new Standard, IFRS 18 Presentation and Disclosure in Financial Statements , will give investors more transparent and comparable information about companies’ financial performance, thereby enabling better investment decisions. It will affect all companies using IFRS Accounting Standards.

IFRS 18 introduces three sets of new requirements to improve companies’ reporting of financial performance and give investors a better basis for analysing and comparing companies:

Improved comparability in the statement of profit or loss (income statement)

Currently there is no specified structure for the income statement. Companies choose their own subtotals to include. Often companies report an operating profit but the way operating profit is calculated varies from company to company, reducing comparability. 1

IFRS 18 introduces three defined categories for income and expenses—operating, investing and financing—to improve the structure of the income statement, and requires all companies to provide new defined subtotals, including operating profit. The improved structure and new subtotals will give investors a consistent starting point for analysing companies’ performance and make it easier to compare companies.

Enhanced transparency of management-defined performance measures

Many companies provide company-specific measures, often referred to as alternative performance measures. Investors find this information useful. However, most companies don’t currently provide enough information to enable investors to understand how these measures are calculated and how they relate to the required measures in the income statement.

IFRS 18 therefore requires companies to disclose explanations of those company-specific measures that are related to the income statement, referred to as management-defined performance measures. The new requirements will improve the discipline and transparency of management-defined performance measures, and make them subject to audit.

More useful grouping of information in the financial statements

Investor analysis of companies’ performance is hampered if the information provided by companies is too summarised or too detailed. IFRS 18 sets out enhanced guidance on how to organise information and whether to provide it in the primary financial statements 2 or in the notes. The changes are expected to provide more detailed and useful information. IFRS 18 also requires companies to provide more transparency about operating expenses, helping investors to find and understand the information they need.

Andreas Barckow, IASB Chair, said:

IFRS 18 represents the most significant change to companies’ presentation of financial performance since IFRS Accounting Standards were introduced more than 20 years ago. It will give investors better information about companies’ financial performance and consistent anchor points for their analysis.

IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, but companies can apply it earlier. Changes in companies’ reporting resulting from IFRS 18 will depend on their current reporting practices and IT systems.

IFRS 18 replaces IAS 1 Presentation of Financial Statements . It carries forward many requirements from IAS 1 unchanged. IFRS 18 is the culmination of the IASB’s Primary Financial Statements project. 

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Watch Andreas Barckow explain the new requirements to improve companies’ financial performance reporting.

1 An IASB study of 100 companies showed that over 60 reported a figure for operating profit, using at least nine different ways to calculate it.

2 The primary financial statements consist of the statement of profit or loss (income statement); statement presenting comprehensive income; statement of financial position (balance sheet); statement of changes in equity; and statement of cash flows.

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