IND AS 1 : Presentation of Financial Statements
Hey friends, Let us discuss about Ind AS 1 in easy manner. Ind As 1 is applicable to General Purpose Financial Statements only.
To prescribes the basis for presentation of “general purpose financial statements” and to ensure comparability both with the entity’s financial statements of previous periods and the financial statements of other entities.
General purpose financial statements (referred to as ‘financial statements’) are those intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs. Ind-As 1 is not applicable to special purpose reports or director’s reports.
It also sets out
- Overall requirements for the presentation of financial statements,
- Guidelines for their structure and
- Minimum requirements for their content and,
- Issues like Going Concern, Consistency, Materiality and Comparative Information.
Recognition, measurement and disclosure requirements for specific transactions and other events are prescribed by other standards.
Scope of Ind AS 1.
Applies to all types of entities, commercial, industrial and business entities, both private & public and whether presenting consolidated or separate Financial Statements. Terminology used in this standard is suitable for profit oriented entities.
If Non-profit making entities apply Ind-AS 1 they may need to amend the descriptions used for particular line items in the financial statements and for the financial statements themselves.
It does not apply to the structure and content of condensed interim financial statements prepared in accordance with Ind-AS 34, Interim Financial Reporting.
What are financial statements?
Financial statements are referred to by Ind-As 1 para 9 as “a structured representation of the financial position and financial performance of an entity”.
Objective Financial statements: To provide information about an entity’s financial position, its financial performance, and its cash flows. In addition, financial statements also show the results of the management’s stewardship of the resources entrusted to it. All this information is communicated through a complete set of financial statements. This objective is achieved by providing information in the complete set of Financial Statements , giving information about an entity’s: (a) assets; (b) liabilities; (c) equity; (d) income and expenses, including gains and losses; (e) contributions by and distributions to owners in their capacity as owners; and (f) cash flows.
What are the Elements of Financial Statements?
What Constitutes Complete Set of Financial statements?
Balance Sheet, Statement of Changes in Equity, Statement of Profit and Loss, Cash Flow Statement and Notes to Accounts.
A Balance Sheet as at the beginning of the earliest comparative period 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. Use of titles for statements other than used in the standards is NOT permitted
Financial statements, except for cash flow information, are to be prepared using accrual basis of accounting. That means no cash basis allowed. An Entity shall make true and fair presentation of: • Financial Position • Financial Performance & • Its Cash Flow.
True and Fair presentation requires faithful representation of effects of transactions and other events and conditions in accordance with definitions and recognition criteria for assets , liabilities , expenses and incomes as set out in Framework Application of Ind-As with additional disclosure is presumed to result in financial statements to achieve fair presentation.
Very important an entity whose financial statements comply with all applicable Ind-As shall make an explicit and unreserved statement of such compliance in the notes.
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Can one rectify inappropriate application of accounting policies by making disclosure?
No, an entity cannot rectify inappropriate application of accounting policies by way of disclosures or notes or explanatory material.
Departure from Ind-As?
Generally it is presumed that compliance with Ind-As results in fair Presentation. However, if management has concluded, compliance would be misleading and conflicting with the objectives set out in Framework, consequently departure from compliance may be necessary.
In such a situation the management may reduce the perceived misleading aspect of compliance by disclosing:-
- The entity has complied with all applicable Ind-AS, except that it has departed from a particular requirement to achieve a fair presentation;
- Details of departure, like • the title of the Ind-As in question, • the nature of the requirement, and • the reason such treatment would be misleading.
- For each period presented, the adjustments to each item in the financial statements that management has concluded would be necessary to achieve a fair presentation.
When preparing financial statements, management makes an assessment of
a) The entity’s ability to continue as a going concern.
b) If the result of the assessment casts significant doubt upon the entity’s ability to continue as a going concern, management is required to disclose that fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern.
c) If the results of the assessment cast no doubt about entity’s ability as a going concern then prepare financial statements on a going concern.
Accrual basis of accounting
Financial statements, except for cash flow information, are to be prepared using accrual basis of accounting.
Materiality and aggregation
Each material class of similar item and Material item of dissimilar nature or function need to be presented separately.
As a rule not to offset Assets and Liabilities, or income and expenses against each other, unless required or permitted by an Ind-As. Reduction of plant, property and equipment by accumulated depreciation and accounts receivable by the allowance for doubtful accounts, which reduce these assets are not considered to be offsetting assets and liabilities. Illustration: Revenue to be presented at gross and Gains at net. Foreign exchange gains and losses may be offset unless material.
Whenever an entity:
- Retrospectively applies an accounting policy, or
- Makes a retrospective restatement of items in its financial statements, or
- When it reclassifies items in its financial statements.
It should include a Balance Sheet as at the beginning of the earliest comparative period.
Also, as a minimum, Two Balance Sheets, Two of each of the other statements and related notes, as at
1. The end of the current period;
2..The end of the previous period (which is the same as the beginning of the current period); and
3.The beginning of the earliest comparative period.
STRUCTURE AND CONTENT
This standard requires disclosures:
(i) in the statement of financial position or
(ii) of comprehensive income, in the separate income statement (if presented),or
(iii) in the statement of changes in equity and requires disclosure of other line items either in those statements or in the notes.
Ind-As 7 Statement of Cash Flows sets out requirements for the presentation of cash flow information.
No prescribed or detailed form. However Guidance note to Schedule III of Companies Act 2013, shall give the standardized formats of financial statements which we have discussed in previous blogs. To visit, click here.
Meaning of Current Assets
An entity shall classify an asset as “current” when:
(a) It expects to realize the asset, or intends to sell or consume it, in its normal operating cycle; or
(b) Held for trading; or
(c) It expects to realize the asset within twelve months after the reporting period; or
(d) The asset is cash or a cash equivalent.
All other assets are classified as “non-current”.
Meaning of Current liabilities
An entity shall classify a liability as “current” when:
(a) It expects to settle the liability in its normal operating cycle;
(b) Held for trading;
(c)The liability is due to be settled within twelve months after the reporting period; or
(d) The entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period.
An entity shall classify all other liabilities as “non-current.”
Normal Operating cycle refers to the period starting from procurement of raw material to the conversion into finished goods and realization into cash & cash equivalents.
For example, If an entity takes 5 days to manufacture goods and takes 3 days in the collection of cash from customers, so Operating cycle period shall be 5+3days = 8 days.
In case entity has multiple business and have different operating cycles, then the classification of asset/liability into current/noncurrent relevant to different business and different operating cycles.
Loans become payable on “Demand” due to breach in contracts then it is current liability.
Breach should be upto Balance sheet date. It should be major breach.
If breach is rectified before approval of accounts and Loan is now repayable on Demand, Then it is non -current liability. (Ind AS-10)
If breach is not rectified before approval of Accounts, but lender allows us time to rectify breach. Such time is if short term, then it is current liability. And if it is long term, then it is non-current liability.
If entity has refinancing option from same facility then it is Non-current Liability.
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“IND AS 1”