Income Statement and Balance Sheet in IAS 1

Last week, we discussed the importance of financial statements in providing an overview of a company's financial performance, position, and cash flows. We also mentioned that Nigeria adopted IFRS as its accounting standard in 2011, replacing the previous Statement of Accounting Standards (SAS).

IAS 1, the International Accounting Standard for Presentation of Financial Statements, outlines the requirements for preparing general-purpose financial statements that are comparable both with the entity's previous statements and with those of other entities. It covers the structure, content, and format of financial statements and provides guidance on various elements and components, such as assets, liabilities, equity, income, expenses, and cash flows.

We highlighted that IAS 1 repealed several previous standards, including IAS 1 - Disclosure of Accounting Policies, IAS 5 - Information to be Disclosed in Financial Statements, and IAS 13 - Presentation of Current Assets and Current Liabilities.

The standard also introduced key terms and definitions, including General Purpose Financial Statements, Impracticable, IFRS, and Materiality. It provides guidelines on aggregation and disaggregation of financial information.

When preparing financial statements, IAS 1 requires an assessment of an entity's ability to continue as a going concern. The complete set of financial statements includes the statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity, statement of cash flows, and accompanying notes and comparative information.

Building on the previous week's presentation, let's delve into the specifics of the income statement and balance sheet as outlined in IAS 1.

The income statement, referred to as the Statement of Profit or Loss and Other Comprehensive Income in the standard, reports on assets, liabilities, equity, income, expenses, gains, and losses. The balance sheet is known as the Statement of Financial Position, and the cash flow statement is now called the Statement of Cash Flows. Additionally, the statement of changes in equity was not recognized in Nigeria's previous accounting standard before the adoption of IFRS.

IAS 1 provides the prescribed content for each of these statements while allowing flexibility for minor modifications to suit the unique nature or form of a specific sector. It emphasizes that the income statement and statement of changes in equity should be prepared using the accrual basis of accounting. Financial statements are generally prepared on a going concern basis unless there are specific circumstances, such as liquidation or cessation of trading.

Entities are required to present each material class of similar items separately and should not offset assets and liabilities or income and expenses unless permitted or required by an IFRS. Offsetting should only occur when it reflects the substance of transactions or events and enhances the understanding of users.

Financial statements are the result of processing numerous transactions or events, which are aggregated into classes based on their nature or function. An entity must present a complete set of financial statements annually, including comparative information for the preceding period. When the reporting period changes and financial statements cover a period longer or shorter than one year, the reason for the change and the lack of full comparability should be disclosed.

Comparative information for the preceding period should be included for all amounts reported in the current period's financial statements, unless IFRSs permit or require otherwise. If relevant, narrative and descriptive information should also have comparative information to facilitate understanding.

In certain circumstances, such as retrospective application of accounting policies, restatement of items, or reclassification of items, an entity may need to present a third statement of financial position at the beginning of the preceding period, in addition to the minimum comparative financial statements.

Understanding and adhering to the provisions of the accounting standard, such as IAS 1, is crucial for ensuring that financial statements present a true and fair representation of an entity's financial position and performance.

Next week, we will explore how to assess the going concern of an entity, as well as other important aspects related to financial statements.