General Requirements for Financial Statements (IFRS)

The required financial statements, as well as the general features, structure, and content of financial statements, are spelt out by International Accounting Standard (IAS) No. 1, Presentation of Financial Statements.

General Requirements for Financial Statements

IAS No. 1 stipulates that a complete set of financial statements should include:

• a statement of financial position (balance sheet);
• a statement of comprehensive income;
• a statement of changes in equity;
• a statement of cash flows; and
• notes comprising a summary of the significant accounting policies and other explanatory notes which disclose information required by IFRS. In addition pieces of information which will enhance the understanding of the financial statements should also be included. Most importantly, a company that applies IFRS must explicitly state in these notes that it complies with the standards.

IAS No. 1 also specifies several general features which should underlie the preparation of financial statements. These features include:

• fair presentation: as described by the IAS, “fair presentation requires the faithful representation of the effects of transactions, other events, and conditions as per the definitions and recognition criteria for assets, liabilities, income, and expenses set out in the Framework”;

• going concern: a company’s financial statements should be prepared on a going concern basis unless a company’s management intends to liquidate the company, cease trading, or has no realistic alternative but to do so;

• accrual basis: accrual accounting should be used when preparing financial statements, except where cash flow information is involved;

• materiality and aggregation: material items are items that can influence the economic decisions of users of financial statements. Material classes of similar items are presented clustered together, while dissimilar items are presented separately unless they are immaterial;

• no offsetting: unless required or permitted by IFRS, assets, liabilities, income, and expenses are not offset;

• frequency of reporting: a company’s financial statements should be prepared at least annually;

• comparative information: comparative information from earlier periods should be disclosed for all reported amounts on the financial statements unless IFRS requires or permits otherwise; and

• consistency: the classification and presentation of items in the financial statements should remain the same from one period to another.

IAS No. 1 specifies the structure and content of financial statements, inclusive of the following:

• Classified Statement of Financial Position: the balance sheet should distinguish between current and non-current assets, and current and non-current liabilities unless a liquidity-based presentation is deemed to be more relevant;

• Minimum Information on the Face of the Financial Statements: the minimum line item disclosures on the face of, or in the notes to, the financial statements are specified by IAS No. 1;

• Minimum Information in the Notes: IAS No. 1 also specifies the disclosures that must be made on the information which is to be presented in the financial statements; and

• Comparative Information: comparative information for the previous reporting period should be provided for all amounts reported on the financial statements unless otherwise permitted or required by another standard.

Question

According to IAS No. 1, which of the following is least likely a general feature which underlies the preparation of financial statements?

1. Going concern.
2. Fair presentation.
3. Cash basis accounting.

Solution

The correct answer is C.

‘Accrual basis’ accounting, and not ‘cash basis’ accounting, is a feature that should underlie the preparation of financial statements according to IAS No.1.

‘Fair presentation’ and ‘going concern’ are features that underlie the preparation of financial statements.