IAS 1: presentation of financial statements

Two companies can earn the same profit and still look very different on paper if one lists its debts sensibly and the other buries them. International Accounting Standard (IAS) 1, Presentation of Financial Statements, is the rule book for how financial statements are laid out.

It tells a company which statements to publish, what the headings must be, how to split assets and liabilities into current and non-current, and what the notes must explain.

This topic covers the complete set of statements, the general features of presentation, the statement of financial position, the statement of profit or loss and other comprehensive income, the statement of changes in equity and the notes. It also explains how International Financial Reporting Standard (IFRS) 18 will replace IAS 1 for periods beginning on or after 1 January 2027, which the next two topics cover in detail.

The previous topics covered the Conceptual Framework. IAS 1 puts those ideas into practice and applies in every statement you prepare in the exam.

Key terms in plain English

Syllabus check

IAS 1 is examinable at this level and is listed with Chapter 3 of the syllabus. It supports Syllabus Area B, item 1(d), the preparation of financial statements and notes in line with IFRS, and the later group statements. This topic covers:

• the components of a complete set of statements;
• the general principles of fair presentation, going concern, accruals, materiality, aggregation, offsetting, consistency and comparatives;
• the structure and minimum content of the statement of financial position and the statement of profit or loss and OCI;
• the statement of changes in equity;
• accounting policies, judgements, estimation uncertainty and capital disclosures in the notes.

Interim reporting (IAS 34) and related parties (IAS 24) are separate topics later in the course.

CAMA 2020 and presentation

The Companies and Allied Matters Act 2020 (CAMA 2020) lays down the legal requirements for the statements of a Nigerian company.

The complete set of financial statements

1. A statement of financial position at the end of the period.
2. A statement of profit or loss and other comprehensive income, as one statement or as two linked statements.
3. A statement of changes in equity.
4. A statement of cash flows, covered later in the course.
5. Notes, with a summary of significant accounting policies and other explanations.
6. Comparative information for the previous period.
7. A third statement of financial position at the start of the earliest comparative period when an entity applies a policy retrospectively, restates items or reclassifies items, and the effect is material.

General features of presentation

The statement of financial position

Current and non-current

An entity normally shows current and non-current assets and current and non-current liabilities as separate classes. Where a liquidity order gives more relevant and reliable information, as for a bank, it lists everything broadly in order of liquidity. Either way, for each line that combines amounts due within and after 12 months, the entity discloses the amount to be recovered or settled after more than 12 months.

An asset is current if it:

1. is expected to be realised, sold or used in the normal operating cycle;
2. is held mainly for trading;
3. is expected to be realised within 12 months after the reporting period; or
4. is cash or a cash equivalent that is not restricted for at least 12 months.

A liability is current if it:

1. is expected to be settled in the normal operating cycle;
2. is held mainly for trading;
3. is due to be settled within 12 months; or
4. the entity does not have the right, at the end of the reporting period, to defer settlement for at least 12 months.

All other assets and liabilities are non-current. The test on liabilities is about the right to defer that exists at the reporting date. A loan that the lender can demand because a covenant was broken on or before that date is current. A promise to fix the breach after the date does not change this.

Minimum line items

The face of the statement shows, as a minimum: property, plant and equipment; investment property; intangible assets; financial assets; investments accounted for using the equity method; biological assets; inventories; trade and other receivables; cash and cash equivalents; assets held for sale; trade and other payables; provisions; financial liabilities; current tax; deferred tax; liabilities in disposal groups held for sale; non-controlling interests within equity; and issued capital and reserves of the owners.

Extra lines are added when relevant to understanding the position. Sub-classifications can be on the face or in the notes.

The statement of profit or loss and other comprehensive income

It has two parts: profit or loss (income and expenses that result in the profit for the period) and other comprehensive income (other gains and losses). An entity may present them in one statement or two. Total comprehensive income is profit or loss plus OCI.

The face shows at least revenue, finance costs, share of profit or loss of associates and joint ventures, tax expense, the result of discontinued operations, profit or loss, each OCI line, and total comprehensive income, with profit and total comprehensive income allocated between the owners and non-controlling interests.

Expenses by nature or by function

Expenses are analysed either by nature (materials, staff costs, depreciation) or by function (cost of sales, distribution, administration). The function method is more useful to many users but needs more judgement. An entity using it must also disclose depreciation, amortisation and employee benefit expense by nature.

Other comprehensive income

OCI is grouped into two:

• Not reclassified to profit or loss later: revaluation gains on property, plant and equipment (International Accounting Standard 16) and on intangible assets (IAS 38), and remeasurements of defined benefit pension plans (IAS 19).
• Reclassified to profit or loss when conditions are met: exchange differences on translating foreign operations (IAS 21), the effective part of cash flow hedge gains and losses (IFRS 9) and fair value gains and losses on debt assets measured at fair value through OCI.

A reclassification adjustment moves an amount previously in OCI into profit or loss, for example when a foreign subsidiary is sold.

The statement of changes in equity

For each component of equity it shows the opening balance, changes and closing balance. The changes come from profit or loss, each item of OCI and transactions with owners as owners: new share issues, dividends, repurchases and cancellations of own shares, and charges for equity-settled share-based payments. Owner transactions are not gains or losses, so they never appear in the statement of comprehensive income but they do change equity.

The notes

The notes add information that is not on the face of the statements, explain how totals are built, and describe items that do not qualify for recognition. They must give:

1. Accounting policies: the measurement basis or bases used and the other policies that help users understand the statements. Where a standard allows a choice, say which was chosen.
2. Significant judgements management made in applying policies, apart from those about estimates. Examples are whether the risks and rewards of ownership of a lease asset were transferred, and whether a sale was in substance a financing arrangement.
3. Sources of estimation uncertainty: key assumptions about the future with a significant risk of causing a material adjustment to carrying amounts within the next year, with the nature of each asset or liability and its carrying amount. Examples are future interest rates, salary changes and useful lives. Give the sensitivity, the expected resolution and any change from past assumptions.
4. Capital management: what the entity treats as capital, any external capital requirements and whether they were met, and how it meets its capital objectives.

What changes under IFRS 18

IFRS 18, Presentation and Disclosure in Financial Statements, was issued by the International Accounting Standards Board in April 2024. It takes effect for annual periods beginning on or after 1 January 2027, with early use allowed, and replaces IAS 1.

The statement of financial position stays much as it is. But the statement of profit or loss gets a new structure with set categories and subtotals, and new rules on management-defined performance measures and grouping of information. The next two topics explain it. Until it applies, use IAS 1 for earlier periods, and read the exam question to see which standard it expects.

The rules in more depth

Why classification matters to a lender

A bank looks at current assets compared with current liabilities to judge whether the company can pay its bills soon. Putting a long-term loan in current liabilities makes the company look weaker, so the rules on when a liability is current are tested carefully.

Why “right to defer at the reporting date”

What management intends to do, or hopes to arrange after the year end, does not decide classification. What decides it is whether, at the reporting date, the entity has a right that lets it delay payment for at least 12 months.

Why there is a separate OCI section

Some gains and losses are real but not yet realised, or relate to remeasurements that would make profit too volatile. Standards put them in OCI so the profit figure stays more meaningful while total comprehensive income still shows the full change in equity.

Nature or function: which to choose

Pick the method that gives more reliable and relevant information. A manufacturer usually prefers function, because gross profit is a familiar measure. A small business may find nature simpler. Both must produce the same profit.

Worked example: classification and expenses

1. Loan. The ₦40 million is due within 12 months, so it is a current liability. The ₦60 million is due after more than 12 months and the entity has the right to defer, so it is a non-current liability.
2. By nature.
   Total expenses = ₦400m + ₦250m + ₦100m + ₦50m = ₦800 million.
   Profit before finance costs and tax = ₦1,000m − ₦800m = ₦200 million.
3. By function.
   Total = ₦550m + ₦120m + ₦130m = ₦800 million.
   Gross profit = ₦1,000m − ₦550m = ₦450 million.
   Profit = ₦450m − ₦120m − ₦130m = ₦200 million.
   The profit is the same.
4. Extra disclosure. Because the function method is used, the notes must still show depreciation (₦100 million) and employee benefit expense (₦250 million) by nature.
5. CAMA 2020. Two directors sign the statements (s. 386) and the format must give a true and fair view (s. 378).

How to score full marks

• Classify with the four tests. For current assets and current liabilities, work through the four conditions in order and state which one is met.
• Look at dates carefully. A loan repayable in instalments is split between current and non-current.
• Name the group for OCI items. For each item, say whether it is reclassified or not and cite the standard.
• Keep owner transactions out of the comprehensive income statement. They belong in the statement of changes in equity.
• Show a full set. If asked to list the components, include comparatives and the third statement of financial position when relevant.
• Check the standard in the question. If the question is about periods from 2027, use IFRS 18 ideas. Otherwise use IAS 1.

Common mistakes in the exam

• Treating a whole long-term loan as non-current when part is due within 12 months.
• Classifying a loan as non-current because management plans to refinance after the year end.
• Putting dividends or share issues in the comprehensive income statement.
• Netting assets against liabilities without a standard allowing it.
• Saying that revaluation gains are reclassified to profit or loss. They are not.
• Forgetting the extra nature disclosures when expenses are shown by function.
• Using IAS 1 headings in a question that asks for IFRS 18 presentation, or the other way round.

Quick revision

• Complete set: financial position, profit or loss and OCI, changes in equity, cash flows, notes, comparatives, third statement when needed.
• Features: fair presentation, going concern, accrual, materiality, offsetting, frequency, comparatives, consistency.
• Current asset tests: operating cycle, trading, 12 months, cash.
• Current liability tests: operating cycle, trading, due in 12 months, no right to defer 12 months.
• OCI: not reclassified (revaluation, defined benefit remeasurements) and reclassified (foreign operations, cash flow hedges, debt assets at fair value through OCI).
• Notes: policies, judgements, estimation uncertainty, capital.
• IFRS 18 replaces IAS 1 from 1 January 2027.
• CAMA 2020: ss. 377, 378, 386, 398 and 399.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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