Though I have posted about balance sheet’s disclosures required under the US’s accounting standard codification, in the past. This post discusses financial statements disclosures required under IFRS, dedicated for those who implement IFRS.
As it is required under the US-GAAP, a supplemental disclosure for financial statements is also required under the IFRS—generally shown as notes to the accounts.
To help users to understand the financial statements and to compare them with financial statements of other entities, an entity normally should present notes in the following order:
1. Statement of compliance with IFRS
2. Summary of significant accounting policies applied
3. Supporting information for items presented in the financial statements
4. Other disclosures
More detailed explanations are presented below. Read on…
Financial statements, however, should not be described as complying with IFRS unless they comply with all the requirements of IFRS. A reporting entity may only claim to follow IFRS if it complies with every single IFRS in force as of the reporting date.
IAS 1 requires an entity whose financial statements comply with IFRS to make an explicit statement of such compliance in the notes.
Financial statements should include clear and concise disclosure of all significant accounting policies that have been used in the preparation of those financial statements. The policy disclosures should identify and describe the accounting principles followed by the entity and methods of applying those principles that materially affect the determination of financial position, results of operations, or changes in cash flows. IAS 1 requires that disclosure of these policies be an integral part of the financial statements.
IAS 8 provides criteria for making accounting policy choices. Policies should be relevant to the needs of users and should be reliable (representationally faithful, reflecting economic substance, neutral, prudent, and complete).
The policy note should begin with a clear statement on the nature of the comprehensive basis of accounting used.
Management must also indicate the judgments that it has made in the process of applying the accounting policies that have the most significant effect on the amounts recognized. The entity must also disclose the key assumptions about the future and any other sources of estimation uncertainty that have a significant risk of causing a material adjustment to later be made to the carrying amounts of assets and liabilities.
IAS 1 also requires an entity to disclose in the summary of significant accounting policies:
Other accounting policies should be disclosed if they could assist users in understanding how transactions, other events and conditions are reported in the financial statements.
The two basic techniques, for the purpose, are:
1. Parenthetical explanations – Supplemental information is disclosed by means of parenthetical explanations following the appropriate statement of financial position items. For example:
2. Footnotes – If the additional information cannot be disclosed in a relatively short and concise parenthetical explanation, a footnote should be used, with a cross-reference shown in the statement of financial position. In accordance with IAS 1 the notes should:
Current receivables may be a single line item in the statement of financial position, as follows:
Valuation accounts are another form of schedule used to keep detail off the balance sheet. For example, accumulated depreciation reduces the book value for property, plant, and equipment, and a bond premium (discount) increases (decreases) the face value of a bond payable as shown in the following illustrations. The net amount is shown in the statement of financial position, and the detail in the notes.
In addition, an entity should disclose the judgments that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognized in the financial statements. For example: when making decisions whether investments in securities should be classified as trading, available for sale or held to maturity, or whether lease transactions transfer substantially all the significant risks and rewards of ownership of financial assets to another party.
Determining the carrying amounts of some assets and liabilities requires estimating the effects of uncertain future events on those assets and liabilities at the end of the reporting period in measuring, for example, the recoverable values of different classes of property, plant, and equipment, or future outcome of litigation in progress.
The reporting entity should disclose information about the assumptions it makes about the future and other major sources of estimation uncertainty at the end of the reporting period—which have a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities within the next financial year.
The notes to the financial statements should include the nature and the carrying amount of those assets and liabilities at the end of the period.
Additionally, when one or more companies are under common control such that the financial statements might vary from those that would have been obtained if the companies were autonomous, the nature of the control relationship should be disclosed even if there are no transactions between the companies.
The disclosures generally should include:
When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements, at a minimum, three statements of financial position, two of each of the other statements, and related notes are required. The three statements of financial position presented are as at:
Although there is no official guidance on this issue, certain details, such as schedules of debt maturities as of the year earlier statement of financial position date, would seemingly be of little interest to users of the current statements and would be largely redundant with information provided for the more recent year-end.
Accordingly, such details are often omitted from comparative financial statements. Most other disclosures, however, continue to be meaningful and should be presented for all years for which basic financial statements are displayed.
Many companies include in their annual reports five- or ten-year summaries of condensed financial information—to increase the usefulness of financial statements. This is not required by IFRS. The presentation of comparative financial statements in annual reports enhances the usefulness of such reports and brings out more clearly the nature and trends of current changes affecting the entity.
If not disclosed, significant events occurring between the date of the statement of financial position and the financial statement issuance date could make the financial statements misleading to others not otherwise informed of such events.
IAS 10 describes two types of subsequent events, as follows :
Examples of post-balance-sheet date events:
(1). A loss on an uncollectible trade account receivable as a result of a customer’s deteriorating financial condition leading to bankruptcy subsequent to the date of the statement of financial position.
(2). A loss arising from the recognition after the date of the statement of financial position that an asset.
(3). Nonadjusting events, which are those not existing at the date of the statement of financial position, require disclosure but not adjustment. These could include:
For a provision to be made, the entity has to have incurred a constructive obligation. This may be an actual legal obligation, but it may also be only an obligation that arises as a result of an entity’s stated polices. However, to preclude the use of reserves for manipulative purposes, provisions for restructuring are subject to additional restrictions, and a provision may only be made once a detailed plan has been agreed and its implementation has commenced.
Contingent liabilities are not recognized as liabilities under IFRS because they are either only possible obligations or they are present obligations that do not meet the threshold for recognition.
IAS 37 defines provisions, contingent assets, and contingent liabilities. Importantly, it differentiates provisions from contingent liabilities.
At the present date, the key recognition issue for contingent liabilities is the probability of a future cash outflow. The probability of this occurring is the threshold condition for recognition: a probable outflow triggers recording a provision, while an unlikely or improbable outflow creates only the need for a disclosure.
In its ongoing business combinations project, the IASB appears likely to conclude that a contingency is usually a combination of an unconditional right or obligation which is linked to a conditional right or obligation.
The unconditional element is always to be recognized, although its value will be a function of the probability of the conditional element occurring. For Example:
If a company is being sued for $10 millions, and it considers that it has a 10% chance of losing, under the existing financial reporting rules, NO provision would be made. If the new approach under consideration were to be adopted, this could be analyzed as an unconditional obligation to pay what the court decides, and this obligation would be measured as 10% of $10 millions. The probability of the loss then shifts from being a recognition criterion to being a measurement tool.
Following the general guidelines on constructive obligations, instead of recognizing one major restructuring provision at a specific time, entities would need to recognize different liabilities relating to the different costs occurring in the restructuring, which costs can occur at different points in time.
Additionally, summary quantitative data about what it manages as capital should be provided as well as any changes in the components of capital and methods of managing capital from the previous period.
The consequences of noncompliance with externally imposed capital requirements should also be included in the notes. All these disclosures are based on the information provided internally to key management personnel.
An entity should also present either in the statement of financial position or in the statement of changes in equity, or in the notes, disclosures about each class of share capital as well as about the nature and purpose of each reserve within equity.
Information about share capital should include:
As it is required under the US-GAAP, a supplemental disclosure for financial statements is also required under the IFRS—generally shown as notes to the accounts.
To help users to understand the financial statements and to compare them with financial statements of other entities, an entity normally should present notes in the following order:
1. Statement of compliance with IFRS
2. Summary of significant accounting policies applied
3. Supporting information for items presented in the financial statements
4. Other disclosures
More detailed explanations are presented below. Read on…
1. Statement of Compliance with IFRS
An entity might refer to IFRS in describing the basis on which its financial statements are prepared without making this explicit and unreserved statement of compliance with IFRS.Financial statements, however, should not be described as complying with IFRS unless they comply with all the requirements of IFRS. A reporting entity may only claim to follow IFRS if it complies with every single IFRS in force as of the reporting date.
IAS 1 requires an entity whose financial statements comply with IFRS to make an explicit statement of such compliance in the notes.
2. Accounting Policy Disclosures
Basically, entities should make financial statement users become aware of the accounting policies used by reporting entities—so that they can better understand the financial statements and make comparisons with the financial statements of others.Financial statements should include clear and concise disclosure of all significant accounting policies that have been used in the preparation of those financial statements. The policy disclosures should identify and describe the accounting principles followed by the entity and methods of applying those principles that materially affect the determination of financial position, results of operations, or changes in cash flows. IAS 1 requires that disclosure of these policies be an integral part of the financial statements.
IAS 8 provides criteria for making accounting policy choices. Policies should be relevant to the needs of users and should be reliable (representationally faithful, reflecting economic substance, neutral, prudent, and complete).
The policy note should begin with a clear statement on the nature of the comprehensive basis of accounting used.
Management must also indicate the judgments that it has made in the process of applying the accounting policies that have the most significant effect on the amounts recognized. The entity must also disclose the key assumptions about the future and any other sources of estimation uncertainty that have a significant risk of causing a material adjustment to later be made to the carrying amounts of assets and liabilities.
IAS 1 also requires an entity to disclose in the summary of significant accounting policies:
- The measurement basis (or bases) used in preparing the financial statements; and
- The other accounting policies applied that are relevant to an understanding of the financial statements.
Note: Measurement bases may include historical cost, current cost, net realizable value, fair value or recoverable amount.
3. Supporting Information for Financial Statement’s Items
Basically, supporting information is required for nearly all items presented on the financial statements. There is, though, a degree of fluidity between showing information “on the face of the accounts” (=directly in the statement of financial position or income statement) and in the notes (= the main categories have to be preserved, but the detail underlying the reported amounts may be shown in the notes).The two basic techniques, for the purpose, are:
1. Parenthetical explanations – Supplemental information is disclosed by means of parenthetical explanations following the appropriate statement of financial position items. For example:
“Equity share capital ($10 par value, 150,000 shares authorized, 100,000 issued) = $1,000,000”Parenthetical explanations have an advantage over both footnotes and supporting schedules, as they place the disclosure in the body of the statement, where their importance cannot be overlooked by users of the financial statements.
2. Footnotes – If the additional information cannot be disclosed in a relatively short and concise parenthetical explanation, a footnote should be used, with a cross-reference shown in the statement of financial position. In accordance with IAS 1 the notes should:
- present information about the basis of preparation of the financial statements and the specific accounting policies used;
- disclose the information required by IFRS that is not presented elsewhere in the financial statements; and
- provide information that is not presented elsewhere in the financial statements, but is relevant to an understanding of any of them.
“Inventories (see Note 2) = $2,550,000”The notes to the financial statements would then contain the following:
“Note 2: Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method, and market is determined on the basis of estimated net realizable value. As of the date of the statement of financial position, the market value of the inventory is $2,620,000.”To present adequate detail regarding certain statement of financial position items, or move complex detail from the face of the accounts, a supporting schedule may be provided in the notes. For example:
Current receivables may be a single line item in the statement of financial position, as follows:
“Current receivables (see Note 3) = $2,300,000”A separate schedule for current receivables would then be presented as follows:
In addition, an entity should disclose the judgments that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognized in the financial statements. For example: when making decisions whether investments in securities should be classified as trading, available for sale or held to maturity, or whether lease transactions transfer substantially all the significant risks and rewards of ownership of financial assets to another party.
Determining the carrying amounts of some assets and liabilities requires estimating the effects of uncertain future events on those assets and liabilities at the end of the reporting period in measuring, for example, the recoverable values of different classes of property, plant, and equipment, or future outcome of litigation in progress.
The reporting entity should disclose information about the assumptions it makes about the future and other major sources of estimation uncertainty at the end of the reporting period—which have a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities within the next financial year.
The notes to the financial statements should include the nature and the carrying amount of those assets and liabilities at the end of the period.
4. Other Required Disclosures
IFRS also requires entities to include other disclosures such as related party, contingent liabilities and unrecognized contractual commitments; and nonfinancial disclosures (e.g., the entity’s financial risk management objectives and policies).a. Related-party Disclosures
A related party is essentially any party that controls or can significantly influence the financial or operating decisions of the company to the extent that the company may be prevented from fully pursuing its own interests. Such groups would include:- Associates
- Investees accounted for by the equity method
- Trusts for the benefit of employees
- Principal owners
- Key management personnel
- Family members of owners or management
“transfer of resources or obligations between related parties, regardless of whether a price is charged.”Disclosures should take place even if there is no accounting recognition made for such transactions (e.g., a service is performed without payment). Disclosures should generally not imply that such related-party transactions were on terms essentially equivalent to arm’s-length dealings.
Additionally, when one or more companies are under common control such that the financial statements might vary from those that would have been obtained if the companies were autonomous, the nature of the control relationship should be disclosed even if there are no transactions between the companies.
The disclosures generally should include:
- Nature of relationship
- Description of transactions and effects of such transactions on the financial statements for each period.
- Financial amounts of transactions for each period for which an income statement is presented and effects of any change in establishing the terms of such transactions different from that used in prior periods.
- Amounts due to and from such related parties as of the date of each statement of financial position presented together with the terms and manner of settlement
b. Comparative Amounts For The Preceding Period
IAS 1 requires that financial statements should present corresponding figures for the preceding period. When the presentation or classification of items is changed, the comparative data must also be changed, unless it is impracticable to do so.When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements, at a minimum, three statements of financial position, two of each of the other statements, and related notes are required. The three statements of financial position presented are as at:
- The end of the current period;
- The end of the previous period (which is the same as the beginning of the current period); and
- The beginning of the earliest comparative period
- The nature of the reclassification;
- The amount of each item or class of items that is reclassified; and
- The reason for the reclassification. In situations where it is impracticable to reclassify comparative amounts, an entity should disclose (a) the reason for not reclassifying the amounts; and (b) the nature of the adjustments that would have been made if the amounts had been reclassified.
Although there is no official guidance on this issue, certain details, such as schedules of debt maturities as of the year earlier statement of financial position date, would seemingly be of little interest to users of the current statements and would be largely redundant with information provided for the more recent year-end.
Accordingly, such details are often omitted from comparative financial statements. Most other disclosures, however, continue to be meaningful and should be presented for all years for which basic financial statements are displayed.
Many companies include in their annual reports five- or ten-year summaries of condensed financial information—to increase the usefulness of financial statements. This is not required by IFRS. The presentation of comparative financial statements in annual reports enhances the usefulness of such reports and brings out more clearly the nature and trends of current changes affecting the entity.
c. Subsequent Event Disclosures
The statement of financial position is dated as of the last day of the fiscal period, but a period of time will usually elapse before the financial statements are actually prepared and issued. During this period, significant events or transactions may have occurred that materially affect the company’s financial position. These events and transactions are usually referred to as subsequent events. IAS 10 refers to these as “events after the date of the statement of financial position.”If not disclosed, significant events occurring between the date of the statement of financial position and the financial statement issuance date could make the financial statements misleading to others not otherwise informed of such events.
IAS 10 describes two types of subsequent events, as follows :
- Adjusting Events – These are events that provide additional evidence with respect to conditions that existed at the date of the statement of financial position and which affect the estimates inherent in the process of preparing financial statements; these are called.
- Non-adjusting Events – These are events that do not provide evidence with respect to conditions that existed at the date of the statement of financial position, but arose subsequent to that date (and prior to the actual issuance of the financial statements); these are called.
Examples of post-balance-sheet date events:
(1). A loss on an uncollectible trade account receivable as a result of a customer’s deteriorating financial condition leading to bankruptcy subsequent to the date of the statement of financial position.
(2). A loss arising from the recognition after the date of the statement of financial position that an asset.
(3). Nonadjusting events, which are those not existing at the date of the statement of financial position, require disclosure but not adjustment. These could include:
- Sale of a bond or share capital issue after the date of the statement of financial position, even if planned before that date.
- Purchase of a business, if the transaction is consummated after year-end.
- Settlement of litigation when the event giving rise to the claim took place subsequent to the date of the statement of financial position.
- Loss of plant or inventories as a result of fire or flood.
- Losses on receivables resulting from conditions (such as a customer’s major casualty) arising subsequent to the date of the statement of financial position.
- Gains or losses on certain marketable securities.
d. Contingent Liabilities and Assets
Provisions are recognized as liabilities (if reliably estimable), inasmuch as these are present obligations with probable outflows of resources embodying economic benefits needed to settle them. Provisions are accrued by a charge against income if:- The reporting entity has a present obligation as a result of past events;
- It is probable that an outflow of the entity’s resources will be required; and
- A reliable estimate can be made of the amount.
For a provision to be made, the entity has to have incurred a constructive obligation. This may be an actual legal obligation, but it may also be only an obligation that arises as a result of an entity’s stated polices. However, to preclude the use of reserves for manipulative purposes, provisions for restructuring are subject to additional restrictions, and a provision may only be made once a detailed plan has been agreed and its implementation has commenced.
Contingent liabilities are not recognized as liabilities under IFRS because they are either only possible obligations or they are present obligations that do not meet the threshold for recognition.
IAS 37 defines provisions, contingent assets, and contingent liabilities. Importantly, it differentiates provisions from contingent liabilities.
At the present date, the key recognition issue for contingent liabilities is the probability of a future cash outflow. The probability of this occurring is the threshold condition for recognition: a probable outflow triggers recording a provision, while an unlikely or improbable outflow creates only the need for a disclosure.
In its ongoing business combinations project, the IASB appears likely to conclude that a contingency is usually a combination of an unconditional right or obligation which is linked to a conditional right or obligation.
The unconditional element is always to be recognized, although its value will be a function of the probability of the conditional element occurring. For Example:
If a company is being sued for $10 millions, and it considers that it has a 10% chance of losing, under the existing financial reporting rules, NO provision would be made. If the new approach under consideration were to be adopted, this could be analyzed as an unconditional obligation to pay what the court decides, and this obligation would be measured as 10% of $10 millions. The probability of the loss then shifts from being a recognition criterion to being a measurement tool.
Following the general guidelines on constructive obligations, instead of recognizing one major restructuring provision at a specific time, entities would need to recognize different liabilities relating to the different costs occurring in the restructuring, which costs can occur at different points in time.
e. Share Capital Disclosures
An entity is required to disclose information that enables users of its financial statements to evaluate the entity’s objectives, policies, and processes for managing capital. This information should include a description of what it manages as capital, the nature of externally imposed capital requirements, if there are any, as well as how those requirements are incorporated into the management of capital.Additionally, summary quantitative data about what it manages as capital should be provided as well as any changes in the components of capital and methods of managing capital from the previous period.
The consequences of noncompliance with externally imposed capital requirements should also be included in the notes. All these disclosures are based on the information provided internally to key management personnel.
An entity should also present either in the statement of financial position or in the statement of changes in equity, or in the notes, disclosures about each class of share capital as well as about the nature and purpose of each reserve within equity.
Information about share capital should include:
- The number of shares authorized and issued;
- Par value per share or that shares have no par value;
- The rights, preferences and restrictions attached to each class of share capital;
- Shares in the entity held by the entity or by its subsidiaries or associates; and
- Shares reserved for issue under options and contracts
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