Basic Principles
Because IFRS are a principle-based set of standards, the IASB avoids setting benchmarks to determine the appropriate accounting treatment. For example, unlike in SFAS 13—Leases, the US standard applying to lease arrangements, the equivalent IASB standard, IAS 17—Leases, sets no benchmarks to determine whether a lease is a finance lease or an operating lease. The person responsible for preparing a financial statement is thus required to use his judgment to give a faithful representation of the situation that is in accordance with the substance of the transaction and economic reality and not merely with its legal form.
Alongside that, great importance is given to the overall comparability of financial statements, both in a single period (across entities) and from period to period (within the same entity). This means that accounting policies should be applied consistently, and benchmarking within industries is encouraged. Furthermore, comparative information is required for at least the preceding accounting period. Financial statements should be prepared at least annually.
The general features of IFRS financial statements (fair representation and compliance with IFRS, along with a going-concern, accrual basis of accounting, materiality and aggregation, offsetting, frequency of reporting, the provision of comparative information, and consistency of presentation) are described in IAS 1—Presentation of Financial Statements (revised in 2007). The qualitative characteristics of financial statements (relevance, faithful representation, comparability, verifiability, timeliness, and understandability) are dealt with in the Conceptual Framework for Financial Reporting (a discussion paper to improve the framework, published in 2008).
Presentation and Disclosure
The purpose of IFRS financial statements is to provide information about the reporting entity that is useful to all stakeholders of the entity. The IASB considers capital providers to be the primary users of financial statements as they provide risk capital. The IASB believes that the provision of financial statements that meet the needs of this special interest group will also meet the needs of a broad range of other users.
In order to fulfil this objective, financial statements have to provide information about an entity’s assets, liabilities, equity, income and expenses (including gains and losses), contributions by and distributions to shareholders, and cash flows. Therefore a complete set of IFRS financial statements comprises:
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A statement of the financial position (formerly called the balance sheet) that presents the assets, liabilities, and equity of the entity. Although there are some minimum requirements, the entity has to use its judgment to decide on what additional items it should include depending on the nature of the business. In most cases entities will present current and non-current assets and current and non-current liabilities as separate classifications.
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A statement of comprehensive income that includes all non-owner changes in equity. Comprehensive income consists of profit or loss for the period and other comprehensive income, i.e. gains and losses that are not presented in profit or loss (for example, exchange differences on translating foreign operations, available-for-sale financial assets, cash flow hedges, gains on property revaluation, actuarial gains and losses on defined benefit pension plans, share of other comprehensive income of associates).
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A statement of changes in equity in which total comprehensive income for the period, effects of retrospective applications or restatements, and transactions with owners in their capacity as owners are presented.
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A statement of cash flows for the period, making a distinction between cash flows from operating, financing, and investing activities.
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Notes summarizing the significant accounting policies used, along with any other explanatory notes that may be required.
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