The International Accounting Standards Board (IASB) recently issued an exposure draft of proposals to amend IAS 1 ‘Presentation of financial statements’.
This exposure draft is a culmination of Segment A of the IASB’s joint project with the US Financial Accounting Standards Board on the important subject of performance reporting. The exposure draft considers the fundamental issue of what information should comprise ‘a complete set of financial statements’.
Statement of financial position
It is proposed that ‘balance sheet’ be replaced by ‘statement of financial position’, a term that is considered to better reflect the information being presented. In addition to the name change, a complete set of financial information would be required to include a statement of financial position, as at the beginning of the reporting period. Therefore, UK companies required to produce comparative information for the previous period would, under the new proposals, be required to produce three statements of financial position.
Statement of recognised income and expense
The statement of recognised income and expense under the proposed revised IAS 1 will combine the information currently contained in the income statement with that included in the existing statement of recognised income and expense. The latter being a statement that broadly mirrors the UK GAAP statement of recognised gains and losses. The proposals do, however, retain the previous distinction of showing both profit or loss for the period and other recognised income and expense.
The IASB has said that it would prefer all items to be recorded in one statement, but has acknowledged that it would be premature to make this a requirement until the other stages of the project are complete. Companies will therefore be allowed to choose between presenting all items in one statement or using two statements. However, where the latter approach is adopted the statement of profit or loss must be placed immediately before the statement of other recognised income and expense.
Items that would be included in other recognised income and expense include:
- changes in revaluation surpluses in accordance with IAS 16 ‘Property, plant and equipment’
- the foreign exchange gains and losses that arise in consolidated accounts as a result of translating the financial statements of foreign operations in accordance with IAS 21 ‘The effects of changes in foreign exchange rates’
- gains and losses arising on measuring available for sale financial assets in accordance with IAS 39 ‘Financial instruments: recognition and measurement’
- the effective portion of gains and losses on hedging instruments in a cash flow hedge accounted for in accordance with IAS 39
- actuarial gains and losses on defined benefit plans in accordance with IAS 19 ‘Employee benefits’.
Statement of changes in equity
The statement of changes in equity will reconcile opening and closing equity showing:
- the total recognised income and expense
- the effect of changes in accounting policies and corrections of errors accounted for in accordance with IAS 8 ‘Accounting policies, changes in accounting estimates and errors’
- changes in equity arising from transactions with owners (e.g. equity dividends).
Notes to the accounts
Notes to the accounts will continue to be regarded as an essential component of a complete set of financial statements.
Smith & Williamson commentary
Establishing the correct way to report financial performance is an area of accounting standards that has a long history. One of the major challenges that standard setters face is the continued use of a mixed measurement framework, whereby some items are reported at historical cost and some at fair value. The ever-widening use of fair values in IFRS serves only to complicate the position further. How to combine these two bases of measurement in one standard whilst still providing meaningful information is difficult. At this stage of the project, we are only seeing the foundations being laid for what will almost certainly be further, and potentially more controversial, debate in the future.
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