International Accounting Standard - A Radical Change to Financial Statement Presentation - Essay Example

International Accounting Standard - A Radical Change to Financial Statement Presentation Generally, IAS 1 (which was last updated in 2007) prescribes the presentation basis of financial statements for general purpose which ensures that the entity’s in question financial statements are comparable with those of the previous period as well as of the other entities’. It clearly sets out the presentation, guidelines with regard to structure and the minimum requirements of financial statements. More precisely, these are expounded on under IAS 1.1. IAS 1.1 states that a complete financial statements’ set has to contain statement of equity changes in a given period, cash flow statement for the period, financial position statement in the period’s balance sheet, comprehensive income statement and the notes which include a summary of explanatory notes and the accounting policies. Any given entity may apply titles for the stated above statements other than those referred to above. A fair presentation as well as compliance with the International Financial Reporting Standards (IFRSs) is the emphasis of IAS 1.15. The use of the relevant IFRSs which contain additional disclosures as necessity calls for is usually presumed to have an end result of a set of financial statements which reflect a fair presentation as IAS 1.15 states. (iasplus.com, 2010) According to the definition given under IAS 1’s stipulations, fair presentation is the requirement that there is a faithful representation of the transaction effects, other events as well as the conditions with emphasis on the recognition and definitions criteria for income, assets, liabilities and expenses stated in the framework. That entity which ensures that its financial statements are in accordance with the IFRSs shall do an unreserved and explicit statement of its compliance in the notes. Also any entity that describes its financial statements as complying with IFRSs where the case is contrary, then that entity will be in contravention with the IFRS requirements. (ec.europa.eu, 2010) The reporting is required for general purpose financial statements as IAS 1 says. The main objective of these financial statements is to give information concerning the position of the business financially, cash flows and performance which is useful to various users while making decisions economically. So as to meet the objective, the entity’s financial statements provide such information as; liabilities, assets, equity, expenses and income cash flows and changes in equity. This information combined with notes to financial statements helps the users of such statements to predict on the future of the entity in its cash flows and moreso on the certainty and timing of such. The main components to the financial statements are with the inclusion of income statement, balance sheet, changes in equity statement with a focus on changes in equity in entirety or changes in equity apart from those occurring due to the transactions with holders of equity, statements of cash flows, and lastly, notes to the statements which state summaries of explanatory notes and accounting policies applied. IFRSs generally do not cover reports presented out of the financial statements’ scope which might include managements’ financial reviews, reports about the environment as well as the statements of value addition. IAS 1 states that those entities with their financial statements complying with the International Financial Reporting Standards make unreserved statements and which are clear to show compliance with the IFRSs in the notes. As IAS 1.16 puts it, it is clearly stated that making disclosures of the applied accounting policies or by explanatory material or by way of notes does not rectify the inappropriateness of the used accounting policies in the financial statements. It is only in very rare scenarios does the management conclude compliance with IFRSs stipulations would lead to misleading or clashing objectives of the frameworks set out in the financial statements, as acknowledged by IAS 1. Where situations like these arise, the business entity maybe required avoiding the requirements of the IFRS and such avoidance should be clearly disclosed on the reasons, nature as well as the effect of the departure or avoidance as per IAS 1.17 and 1.18. The presumption under IAS 1 is that accounts or financial statements are prepared annually. In case the yearly reporting period changes and the statements are made for such a different period, the entity is required to make a disclosure for such a change and also make a warning with regards to predicaments of comparability as IAS 1.49 states. (xtremepapers.net, 2011) As per year 2008, projects were underway to bring about the necessary changes to make presentation of financial statements of any entity better. IASB put up a project, which is a multipurpose one to deal with the presentation of the financial statements. A revised version of IAS 1 was issued and its concentration in the project by IASB was the first phase of the undertaking. Other stages of the project’s stipulations, may with the inclusion of various principles to garner the information necessary for every of the financial statements. This may refer to the subtotals as well as totals alike that should be present in every of the reported financial statements. The debate on whether or not the other parts of the expenses or income should be split to be presented in the profit and loss statement or the method of indirect or direct approach to cash flows has been on. FASB and IASB alike have come up with a decision that the presentation of financial statements should give information in a way that shows a picture of cohesion in the financial operations of as well as the separation of financial activities of a business entity from the business and the activities concerning the owners. Owners’ activities should be separated from those of the entity. Another type of the ongoing project is set to deal with the interim reporting of financial statements. This revised IAS 1 corresponds to the US GAAP standards. That is, Financial Accounting Standards 130 which concentrates on the comprehensive income reporting. (Epstein and Jermakowicz, 2008 p22) The financial statements’ presentation talks about offsetting and to this IAS 1 states that liabilities and assets, expenses and income may never offset each other unlike in a situation where it is permitted or required by a specific standard. Any type of offsetting may hinder the users of the financial statements in understanding the transactions’ substance as well as events which have taken part and inhibits them form making an accurate assessment of the future cash flows of a business enterprise. Also each and every component in the financial statements should always be given an identity in a distinguished and clear way so as to present other aspects of information in the yearly reports or even documents. It is good to apply the IFRS to make the financial statements as per IAS 1. All the IFRS requirements should be put in practice in making of identities of the components. As per IAS 1 reserves’ purpose and nature should be within equity and disclosure should be done on the balance sheet’s face or even in the notes to the accounts. Provisions under IAS 1 which are made in a given period should be one of the items that must be provided at a minimum in the balance sheet. Dividends according to IAS 1 should be disclosed in the statement of income that states the equity changes or even in the statements’ notes. The dividends’ amount that is recognized in form of distributions to the shareholders in that period as well as the amount per share related. Also the IAS 1 makes it a requirement that the dividends declared be declared in the financial statements and that were authorized for issuance as well. The amount of gross revenue relating to the period should form the face of the income statement. Lack of compliance with this requirement by this IAS 1 has been a problem noted and it usually happens to the insurance sector. Lastly, the country of incorporation as well as the domicile should be disclosed as per the requirements of IAS 1. The legal form of the enterprise and the country where it was incorporated also should form part of this disclosure. (Centre on Transnational Corporations (United Nations), et al., 2007 p91) The revised form of IAS 1 refers to the balance sheet as the financial position statement, the income statement as the comprehensive income statement, changes in equity statement is referred to as the same way. Cash flow statement is called the statement of cash flows. The other thing that has not changed is the notes to the financial statements part which is the same. (European Commission, 2008) As described in IAS 1, there should not be anything that should prohibit or even discourage a complete publishing of financial statements in an entity. That is the interim report of the financial position of the business other than the financial statements that have been selected. The standard presented in IAS 34 also says that there is no prohibition or discouragement of an entity from making part of the condensed financial statements more items than the required or the explanatory notes selected. IAS 34 which is also a relevant standard in the presentation says that there is the utilization of complete statements for any given interim period. Also such financial statements would contain all disclosures that the standard calls for and the ones that IFRS requires. (IASCF and IASB, 2008 p1718) The revised version of the IAS 1 impacts on 28 IFRS and IAS by making a simple change to a few standards nomenclature. The aim of IASB in issuing the IAS 1 was to attempt to bring in line the SFAS 130. Also this revised IAS 1 is said not to have achieved much other than changing the financial statements nomenclature. There is an effect on the wording of other standards as well as 10 interpretations. Of notable impact is the fairness of the standards to include the liabilities of employee, hedging, translation of other foreign operations and accounting. This new standard became in operation from January 2009. In progress is the second phase of the project of IASB of convergence. (Grover, 2007) IAS 1.15 was, however, seen to be in contradiction by the Deloitte production. This is the point where the question of the proposed approach to reporting where departure of IFRS to get a fair presentation is suggested. In the same line IAS 1.12 states that inappropriate treatments of accounting cannot be rectified by the disclosure of the policies accounting or by notes. However, IAS 1.15 is in contradiction of this basic concept. (iasplus.com, 2002) The other IASs that talked about the presentation of financial statements are IAS 5, IAS 13, and IAS 1.10. But these have been suspended. (iasplus.com, 2011) To make more credible presentations there has been an introduction of IFRS in year 2011 to ensure that the sum of the balance sheet get an easier understanding of the balance sheet with a simple glance. International regulations of accounting have released a discussion paper as per the study by Beazacar. This paper contains proposals to the changes that will bring a new feel of the statements presented during a financial reporting. This proposal was brought about by a joint committee which wanted to have a look at the major regulations in these International Standards. The standards are with the inclusion of IASB and FASB. This is after several years of deliberations starting year 2002. The very first of the preliminary discussions was released in year 2008. The preliminary discussion of 2008 had in it the changes to the presentation of financial statements. The members of public were given up to 2009 April to make comments on this proposal. Subsequent to the public feedbacks it would become a draft of exposure and afterwards would be moved to become a FRS. The proposed change of the financial statements regarding the look by the two boards of regulations is consistent with those objectives set to make an improvement on the reporting of financial statements. This discussion is about the way a business entity would present a financial statement’s information, which is very essential since these statements are the core to financial reporting. (Benzacar, 2009) There is a work plan set by the IFRSs concerning the presentation of financial statements. This project is in progress and the set up is in various stages. The aim of this project is to obtain a world standard which will serve as guidance to presentation as well as organization of financial statements’ information. The goal of this board is to improve on how usable the financial information is, which is usually put in the report of financial statements so as to aid the management in communicating information to various stakeholders and moreso to help in the coming up with informed decisions about the same. The phases set are three. That is, phases A, B and C. “A” stage has been completed as per year 2011 while “B” is in progress. “C” has not been started yet. (ifrs.org, 2011) The various phases can be explained as follows: phase A was about the revision of IAS 1. The IASB wanted to make changes to this IAS so as to make presentation of financial statements to be in line with FASB 130 about comprehensive income reporting. In September of year 2007, FASB came up with a decision to issue an exposure that was combined for phase A and phase B’s draft. Also issued were the tentative conclusions set by FASB. The most significant fact was that a complete report containing all financial statements was to contain financial position statement, comprehensive income statement as well as a change of equity statement besides the cash flow statement. A preliminary review as well as a tentative view was issued in mid 2008 upon how presentation would be done on the financial information. There should be cohesion as presented in the entity’s financial statements as per this phase’s requirement. Cohesion should be evident in the line-item level. Line items’ labeling on financial statements should be similar. Also should be the case in the sections and categories in the financial statements presented. Changes as per phase B would be from IAS 1 to IAS 7. Phase C sets a goal in the IASB to converge the given standards on or before mid 2011. The tasks in phase C were about the display and presentation of the interim information from financial statements presented for the US GAAP. Phase C was set to follow immediately after phase B. Various factors to be addressed in phase C are with the inclusion of whether the interim information in the financial statements should be reported in a condensed manner, the comparative durations required, whether public companies and non-public companies’ guidance should be different and the financial statements to form the interim statements. (ifrs.com, 2008) In summary, the first phase, phase A seeks to address what makes a complete financial statements’ set and also includes the requirements of presenting comparative information. The second phase, phase B has its focus on the basic issues regarding presentation as well as display in the financial statements’ information. The third and the last phase, phase C addresses display and presentation of the interim information. The requirements set in IAS 34 might be reconsidered by IASB under this last phase. (mazars.com, 2008) While the framework of IASB is not a standard, it serves in the presentation as well as preparation of financial statements serves in guiding the resolution of issues of accounting which are not directly addressed in standards. Absence of any standard or even an interpretation which precisely talks about transactions, IAS number 8 makes it a requirement that each and every business entity applies its best judgment while developing as well as applying accounting policies which gives a result of reliable and relevant information from the financial statements. In the process of making this judgment the IAS number 8.11 calls for the management to make it a consideration the recognition criteria, definition and the concepts of measurement for liabilities, assets, income as well as expenses in the set framework. IASB took up the framework in year 2001. Originally, this framework had been applied by IASC in year 1989. The framework is being revised currently and IASB has come up with a project to do this. Note that the IASs (International Accounting Standards) had been issued by IASC which was the body in operation from 1973 through 2000. Afterwards, IASC was replaced by IASB from year 2001. IASB has made changes to several IASs and has also come up with proposals to amend others. Some of the IASs have been done away with and instead replaced by IFRSs (International Financial Reporting Standards). The body (IASB) has adopted various IFRSs upon topics which were addressed by IASs. Also there are proposals for IFRSs seeking to address issues not previously handled by IASs. Interpretation in these standards has also been issued, previously by IASC and currently by IASB. Financial statements presented by any business entity may not be taken or described as complying to the set of IFRSs unless these are in total compliance with the standards applicable as well as the equivalent interpretation. (iasplus.com, 2011) As the study is being concluded many aspects have been noted about fair presentation of financial statements of any given entity. Of essence is the fact that generally, presentation of financial statements is covered in IAS 1. More particularly the issue of fair presentation is what IAS 1.15 talks about. Various other IASs like IAS 5, 13 and 1.10 which also revolve around the same topic have been done away with and the equivalents to replace them are the various IFRSs. Thus, it is also good to consider what the IFRSs talk about the same topic of presentation of financial statements and more emphasis should be give to such IFRS as IFRS number 130 which is the corresponding IFRS for IAS 1. It is also vital to take note that new proposals are being brought about every day regarding new IFRSs to replace various IASs. New IFRSs which do not correspond to any of IASs are also being proposed by the concerned bodies. That is, FASB and IASB. The proposals are especially being considered to streamline the function of financial reporting. Reference list: Benzacar, Karine. (2009). IFRS Brings A Radical Change to Financial Statement Presentation. Retrieved 20 March 2011 http://www.knowledgeplus.org/pdfs/CMA_IFRS_statements_February09.pdf Centre on Transnational Corporations (United Nations), et al. (2007). International Accounting and Reporting Issues. United Nations Publications. p 91. ec.europa.eu. (2010). International Accounting Standard 1: Presentation Of Financial Statements. Retrieved 20 March 2011 http://docs.google.com/viewer?a=v&q=cache:s1mdSqGZaoIJ:ec.europa.eu/internal_mark et/accounting/docs/consolidated/ias1_en.pdf+fair+presentation+of+financial+statements &hl=en&gl=ke&pid=bl&srcid=ADGEEShlff- e5AeOa9CZLcFX2Xvmb0wiaCluV6qvfxYl3pKm1A6PHICtODsn47H7BwGItvmqgPE QRqcvuuScTGkc- x4E_Ky4loQWEiniCCIS5u8xcnrbkCzxhQniYmijtZ9r3dKd4IyL&sig=AHIEtbQGXmW BMEOu4e9tUqy2KNy7TAJfug Epstein, Barry J. and Jermakowicz, Eva K. (2008). Wiley IFRS 2008: Interpretation and Application of International Accounting and Financial Reporting Standards 2008. John Wiley and Sons. Edition illustrated.p 22. European Commission. (2008). Endorsement of IAS 1: Presentation of Financial Statements. Retrieved 20 March 2011 http://docs.google.com/viewer?a=v&q=cache:rXnycMR- uQAJ:ec.europa.eu/internal_market/accounting/docs/effect_study_en.pdf+ias+1&hl=en& gl=ke&pid=bl&srcid=ADGEEShGhMLMIbVDHuHmVLDID2iiKBtll3oQ0LTaNE7vzP yWcuwZFRo5sAAY2pSmz- dSzo5bWxEzaKazui4iz8T6gZKALcYEsaWQCot4iza0HQljnBH2-11KBx- OsWQFuY0yLdLdsqdz&sig=AHIEtbRzwMrg0f0SfIZiZXTape2sYHEZBg Grover, Nitish. (2007). Revised IAS 1- Where are Accounting Standards Heading- Is there a confusion? Retrieved 20 March 2011 http://www.glgroup.com/News/Revised--IAS-1--- Where--are--Accounting--Standards--Heading---Is--there--a--confusion--17057.html iasplus.com. (2002). Exposure Draft of Proposed Improvements to International Accounting Standards. Retrieved 20 March 2011 http://docs.google.com/viewer?a=v&q=cache:jvJWLJBVxHkJ:www.iasplus.com/dttletr/e dimprove.pdf+ias+1.15&hl=en&gl=ke&pid=bl&srcid=ADGEESilfxopESIlCIi5HrciEOw CjiQnGcgYzyXkrXDN4gvw552w02w_jRtWk_FlBrX5VDdHd5JCccjhOtGL81hHbnYB NqEBLq9TRLPvb5dNnDfsslmyjXRpsYP9rrC7ZtAmTwmSM0qh&sig=AHIEtbQ75toqz jw5di0Nz3JBli11jSVs2A iasplus.com. (2010). Summary of IAS 1. Retrieved 20 March 2011 http://www.iasplus.com/standard/ias01.htm iasplus.com. (2011). IAS 1: Presentation of Financial Statements. Retrieved 20 March 2011 http://www.iasplus.com/standard/ias01.htm iasplus.com. (2011). Summaries of International Financial Reporting Standards. Retrieved 20 March 2011 http://www.iasplus.com/standard/standard.htm ifrs.org. (2011). Financial Statement Presentation. Retrieved 20 March 2011 http://www.ifrs.org/Current+Projects/IASB+Projects/Financial+Statement+Presentation/ Financial+Statement+Presentation.htm International Accounting Standards Committee Foundation, and International Accounting Standards Board. (2008). A Guide through International Financial Reporting Standards. Kluwer. Edition illustrated. p 1718. Mazars.com. (2008). Financial Statement Presentation. Retrieved 20 March 2011 http://docs.google.com/viewer?a=v&q=cache:99wgz6y8BaUJ:www.mazars.com/mazars page/download/32765/695908/file/IFRS%2520Technical%2520Bulletin%2520IAS%252 01%2520'Financial%2520Statement%2520Presentation'.pdf+ifrs+presentation+of+financ ial+statements+projects+phase+a,+b+and+c&hl=en&gl=ke&pid=bl&srcid=ADGEESgO 0XI6QlJOPxDqFrHC3uLwoq2XH7arwM4K2_jkfDZCQksp1CUCS_r_LhDpOtowyLgF XlW38Du_y1A1AbufefVIICiejQRjvtRyNR5wEdUlxIfiQyxCeQmlrK8s3XjM3gpw0Uz1 &sig=AHIEtbSapIN5OMuiJaC6Xo1_JmKuy0_vpQ McClain, Guy and McLelland, Andrew J. (2008). Shaking Up Financial Statement Presentation. Retrieved 20 March 2011 http://www.ifrs.com/overview/Financial_Management/financial_statement.html xtremepapers.net. (2011). IAS 1 Presentation of Financial Statements. Retrieved 20 March 2011 http://docs.google.com/viewer?a=v&q=cache:cs5BPybTR1wJ:www.xtremepapers.net/A CCA/index.php%3Fdir%3DInformation%2520about%2520IASs/%26file%3DIAS%2520 1%2520PRESENTATION%2520OF%2520FINANCIAL%2520STATEMENTS.doc+fai r+presentation+of+financial+statements&hl=en&gl=ke&pid=bl&srcid=ADGEEShcHL8 92YvlTwg-lxpd_Q832SwAj_khv24kR3sCWLEDwepW2Q9JRRq7SUe- kdJp84SozDBe9- uQFDwixcA8xYk3yozJJ_a_qGwBpAW0BqitSuB9AP4pT9lqHrR3NlhsfBqk787w&sig= AHIEtbTW7kud48EDXSbWT4C-ADTXuCt9fQ Read More