IAS 1: Presentation of Financial Statements – A Comprehensive Overview

IAS 1 remains the “constitution” of financial reporting until 2027, when it will be superseded by the new IFRS 18. This overview helps systematize current structural requirements and understand the baseline upon which future changes will be built.

Executive Summary

International Accounting Standard 1 (IAS 1) sets out the fundamental basis for the presentation of general purpose financial statements. Its primary objective is to ensure comparability of the entity’s financial statements, both with its own financial statements of previous periods and with the financial statements of other entities. The standard outlines general requirements for the presentation of financial statements, guidelines for their structure, and minimum requirements for their content, guaranteeing that they provide a fair presentation of the financial position, financial performance, and cash flows.

Key provisions of IAS 1 include the definition of a complete set of financial statements, which comprises:

• A statement of financial position;
• A statement of profit or loss and other comprehensive income;
• A statement of changes in equity;
• A statement of cash flows;
• Notes.

The standard requires the classification of assets and liabilities into current and non-current, except when a presentation based on liquidity provides information that is reliable and more relevant. It also establishes detailed rules regarding information to be disclosed either in the primary statements or in the notes, and explicitly prohibits the presentation of any items as “extraordinary.”

A crucial aspect is flexibility in presentation: expenses in the statement of profit or loss may be classified by their nature or their function. The standard also regulates the presentation of Other Comprehensive Income (OCI), requiring items to be grouped based on whether they will be reclassified (recycled) subsequently to profit or loss.

Effective from January 1, 2027, IAS 1 will be replaced by the new standard IFRS 18 “Presentation and Disclosure in Financial Statements,” which will inherit many of its key requirements.

1. Objective and Scope

1.1. Objective of the Standard

The main objective of IAS 1 is to prescribe the basis for presentation of general purpose financial statements to ensure comparability. This comparability is achieved through unified approaches to structure and content, enabling comparison of:

• The entity’s financial statements over different periods.
• The entity’s financial statements with those of other entities.

The standard sets out overall requirements for presentation, guidelines for structure, and minimum requirements for content.

1.2. Scope

IAS 1 applies to all entities in preparing and presenting general purpose financial statements in accordance with International Financial Reporting Standards (IFRSs). General purpose financial statements are those intended to meet the needs of users who are not in a position to require reports tailored to their particular information needs (e.g., investors, creditors).

The standard covers:

• Profit-oriented entities, including those in the public sector.
• Not-for-profit entities (which may need to amend the descriptions used for particular line items).
• Entities presenting consolidated and separate financial statements.

The standard does not apply to the structure and content of condensed interim financial statements, which are governed by IAS 34 “Interim Financial Reporting.”

1.3. Interaction with Other Standards

While IAS 1 is the foundational standard, it operates in conjunction with other IFRSs that regulate the recognition, measurement, and disclosure of specific transactions:

• IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”: Prescribes the criteria for selecting and applying accounting policies.
• IAS 7 “Statement of Cash Flows”: Sets out requirements for the presentation of cash flow information.
• IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”: Regulates the classification and presentation of such assets and the results of discontinued operations.

2. Purpose and Components of Financial Statements

2.1. Purpose of Financial Statements

According to IAS 1, financial statements are a structured representation of the financial position and financial performance of an entity. Their primary objectives are:

1. To provide information useful to a wide range of users in making economic decisions.
2. To show the results of the stewardship of management over the resources entrusted to it.

To meet these objectives, financial statements must provide information about an entity’s:

• Assets;
• Liabilities;
• Equity;
• Income and expenses, including gains and losses;
• Contributions by and distributions to owners in their capacity as owners;
• Cash flows.

This information, along with other information in the notes, assists users of financial statements in predicting the entity’s future cash flows.

2.2. Complete Set of Financial Statements

A complete set of financial statements comprises the following components, which must be presented with equal prominence:

Component	Description
Statement of financial position	Presented as at the end of the period.
Statement of profit or loss and other comprehensive income	Presented for the period. May be presented as a single statement or as two separate statements (a statement of profit or loss and a statement of comprehensive income).
Statement of changes in equity	Presented for the period.
Statement of cash flows	Presented for the period.
Notes	Comprising significant accounting policies and other explanatory information.
Comparative information	In respect of the preceding period for all amounts reported.
Statement of financial position as at the beginning of the preceding period	Often called the “third balance sheet.” Required if an entity applies an accounting policy retrospectively, makes a retrospective restatement of items, or reclassifies items.

Entities may use titles for the statements other than those used in the Standard (e.g., using “Statement of Comprehensive Income” instead of “Statement of Profit or Loss and Other Comprehensive Income”).

2.3. General Features of Presentation

Principle	Description
Fair Presentation and Compliance with IFRSs	Financial statements must fairly present the financial position, financial performance, and cash flows. An entity whose financial statements comply with IFRSs must make an explicit and unreserved statement of such compliance in the notes.
Going Concern	Management must assess the entity’s ability to continue as a going concern. Financial statements are prepared on a going concern basis unless management intends to liquidate the entity or to cease trading.
Accrual Basis of Accounting	An entity recognizes items as assets, liabilities, equity, income, and expenses (the elements of financial statements) when they satisfy the definitions and recognition criteria, not when cash is received or paid (except for cash flow information).
Materiality and Aggregation	An entity must present separately each material class of similar items. Immaterial items should be aggregated with other amounts. Information is material if omitting, misstating, or obscuring it could influence decisions that users make.
Offsetting	Assets and liabilities, and income and expenses, must not be offset (netted) unless required or permitted by an IFRS.
Frequency of Reporting	A complete set of financial statements must be presented at least annually. If the reporting period changes, additional disclosures are required.
Comparative Information	An entity must present comparative information in respect of the preceding period for all amounts reported in the current period’s financial statements.
Consistency of Presentation	The presentation and classification of items in the financial statements must be retained from one period to the next unless a change is required by an IFRS or results in information that is reliable and more relevant.

3. Structure and Content of Statements

3.1. Statement of Financial Position

Current/Non-current Distinction

IAS 1 requires an entity to present assets and liabilities classified as current and non-current. An exception applies when a presentation based on liquidity (in ascending or descending order) provides information that is reliable and more relevant. This is typical for financial institutions.

The Operating Cycle

The operating cycle is the time between the acquisition of assets for processing and their realization in cash or cash equivalents. When the entity’s normal operating cycle is not clearly identifiable, it is assumed to be 12 months.

Current Assets

An asset is classified as current when it satisfies any of the following criteria:

• It is expected to be realized in, or is intended for sale or consumption in, the entity’s normal operating cycle;
• It is held primarily for the purpose of trading;
• It is expected to be realized within twelve months after the reporting period;
• It is cash or a cash equivalent (unless restricted from being exchanged or used to settle a liability for at least twelve months).

All other assets are classified as non-current. Deferred tax assets are always classified as non-current.

Current Liabilities

A liability is classified as current when it satisfies any of the following criteria:

• It is expected to be settled in the entity’s normal operating cycle;
• It is held primarily for the purpose of trading;
• It is due to be settled within twelve months after the reporting period;
• The entity does not have the right at the end of the reporting period to defer settlement of the liability for at least twelve months after the reporting period.

All other liabilities are classified as non-current. Deferred tax liabilities are always classified as non-current.

Classification of Liabilities and Covenants

The right to defer settlement must exist at the end of the reporting period and must have substance. The existence of this right may depend on compliance with covenants (special conditions in a loan agreement).

• Covenants tested on or before the reporting date: These affect classification. If a covenant is breached at the end of the reporting period, the liability becomes current, even if the lender agrees, after the reporting period and before the financial statements are authorized for issue, not to demand immediate payment (a waiver).
• Covenants tested after the reporting date: These do not affect classification at the end of the reporting period. However, if there is a risk of breach, additional disclosures are required.

Management’s intention to settle the liability early does not affect its classification as non-current if the right to defer exists.

Information Presented in the Statement of Financial Position

The statement must include, at a minimum, line items that present the following amounts:

• Property, plant and equipment;
• Investment property;
• Intangible assets;
• Financial assets (excluding amounts shown under other headings);
• Investments accounted for using the equity method;
• Inventories;
• Trade and other receivables;
• Cash and cash equivalents;
• Assets classified as held for sale (in accordance with IFRS 5);
• Trade and other payables;
• Provisions;
• Financial liabilities (excluding amounts shown under other headings);
• Current and deferred tax assets/liabilities;
• Non-controlling interests;
• Issued capital and reserves attributable to owners of the parent.

Additional line items, headings, and subtotals are presented when such presentation is relevant to an understanding of the entity’s financial position.

3.2. Statement of Profit or Loss and Other Comprehensive Income

Structure and Definitions

The statement displays all income and expenses for the period.

• Profit or loss (P&L): Total income less expenses, excluding components of other comprehensive income. This is the “default” category.
• Other comprehensive income (OCI): Items of income and expense (including reclassification adjustments) that are not recognized in profit or loss as required or permitted by other IFRSs. Examples include: changes in revaluation surplus, gains/losses on translating the financial statements of foreign operations, and remeasurements of defined benefit plans.
• Total comprehensive income: The sum of profit or loss and other comprehensive income.

Presentation Options

1. Single statement approach: One “Statement of Profit or Loss and Other Comprehensive Income” with two sections (profit or loss presented first, followed directly by OCI).
2. Two-statement approach: A separate “Statement of Profit or Loss” immediately followed by a “Statement of Comprehensive Income,” which begins with profit or loss.

Classification of Expenses

Expenses recognized in profit or loss are analyzed using one of two methods:

1. By nature of expense: Expenses are aggregated in the statement of profit or loss according to their nature (e.g., depreciation, purchases of materials, transport costs, employee benefits, advertising costs) and are not reallocated among functions within the entity. This method is simpler to apply.
2. By function of expense (or “Cost of Sales” method): Expenses are classified according to their function as part of cost of sales or, for example, the costs of distribution or administrative activities. This method can provide more relevant information to users but requires considerable judgment in the allocation of costs. Entities using this method must disclose additional information on the nature of expenses (including depreciation and amortization expense and employee benefits expense) in the notes.

Presentation of OCI and Reclassification Adjustments

Items of OCI must be grouped based on whether they will be reclassified (recycled) subsequently to profit or loss:

• Will not be reclassified: e.g., changes in revaluation surplus (IAS 16), remeasurements of defined benefit plans (IAS 19).
• May be reclassified: e.g., exchange differences on translating foreign operations (IAS 21).

Reclassification adjustments (often called “recycling”) are amounts reclassified to profit or loss in the current period that were recognized in OCI in the current or previous periods. These adjustments must be disclosed.

Material and Extraordinary Items

• When items of income or expense are material, an entity must disclose their nature and amount separately.
• IAS 1 explicitly prohibits the presentation of any items of income or expense as “extraordinary items,” in the statement(s) presenting profit or loss and other comprehensive income or in the notes.

3.3. Statement of Changes in Equity

This statement must present:

• Total comprehensive income for the period, showing separately the total amounts attributable to owners of the parent and to non-controlling interests.
• The effect of retrospective application or retrospective restatement for each component of equity in accordance with IAS 8.
• A reconciliation between the carrying amount at the beginning and the end of the period for each component of equity, separately disclosing changes resulting from:
  • Profit or loss;
  • Other comprehensive income;
  • Transactions with owners in their capacity as owners (showing separately contributions by and distributions to owners and changes in ownership interests).

The amount of dividends recognized as distributions to owners during the period, and the related amount of dividends per share, must be presented either in the statement of changes in equity or in the notes.

3.4. Notes to the Financial Statements

The notes are an integral part of the financial statements. They must:

1. Present information about the basis of preparation of the financial statements and specific material accounting policies used.
2. Disclose the information required by IFRSs that is not presented elsewhere in the financial statements.
3. Provide information that is not presented elsewhere in the financial statements but is relevant to an understanding of any of them.

Notes must be presented in a systematic manner. An entity must cross-reference each item in the primary statements to any related information in the notes.

Specific Disclosure Focus Areas:

• Material accounting policy information: Entities must disclose material accounting policy information (previously “significant accounting policies”). Information is material if, when considered together with other information, it can reasonably be expected to influence decisions of primary users.
• Judgments: An entity must disclose the judgments (apart from those involving estimations) 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.
• Sources of estimation uncertainty: An entity must disclose information about the assumptions it makes about the future, and other major sources of estimation uncertainty at the end of the reporting period, that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year.
• Capital management: An entity must disclose information that enables users of its financial statements to evaluate the entity’s objectives, policies, and processes for managing capital.

4. History and Future Developments

Evolution of the Standard

IAS 1 has a long history, evolving from separate standards regarding the disclosure of accounting policies (1975), information presentation (1976), and current/non-current classification (1979) into a single comprehensive standard first issued in 1997. It was substantially revised in 2003 and 2007. Since then, it has undergone numerous amendments, particularly regarding the classification of liabilities with covenants, the definition of materiality, and the presentation of OCI.

The Future: Transition to IFRS 18

The key future change is the issuance of IFRS 18 “Presentation and Disclosure in Financial Statements” in April 2024, which will supersede IAS 1 effective from January 1, 2027. While the new standard will retain many of the core principles of IAS 1, it will introduce new requirements, specifically regarding:

• The structure of the statement of profit or loss (introducing defined categories like Operating, Investing, and Financing);
• The disclosure of Management Performance Measures (MPMs).

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