Natasha Lee looks at the issues involved in presenting financial statements under IFRS.
We are more than halfway through 2008, so the majority of companies required to prepare their financial statements under International Financial Reporting Standards (IFRS) should be doing so by now. As companies have gone through the initial pain barrier, it is imperative they stay up to date on the requirements of IFRS, but more importantly, on how these financial statements are being interpreted.
The key differences between presenting financial statements under IFRS compared to, say, UK GAAP include the:
- format of the income statement
- format of the balance sheet
- presentation of gains and losses through equity
- classification of balances between current and
non-current.
Though some companies still follow the UK GAAP style of reporting under IFRS, the majority have adopted what has become known as the IFRS format for their income statement and balance sheet, as illustrated. However, this does not necessarily allow for easier comparisons between companies, given the rules about presenting under IFRS, once minimum mandatory disclosure headings have been complied with. The effect of this is that familiar disclosures such as current and net assets have virtually disappeared, which may make it more time-consuming for the reader to work out what financial information has been provided.
Presenting gains and losses
Under IFRS, companies are allowed to present gains and losses through equity via a statement of recognised income and expense (SORIE), which is the IFRS equivalent of the statement of recognised gains and losses under UK GAAP. However, based on more recently published IFRS-compliant financial statements, there is a growing trend towards presenting gains and losses through equity via a statement of changes in equity (SOCIE). This essentially presents all movements in equity balances (such as share capital, profit and loss account and other reserves) as one primary statement, in addition to the related notes in the financial statements. Fair value accounting is prevalent throughout IFRS and this has resulted in a greater quantity of gains and losses being recognised through equity. A SOCIE has much more complex disclosure requirements than a SORIE, so it is not immediately obvious to the reader which gains and losses have been recognised through equity.
Current v non-current balances One of the key presentational differences under IFRS compared to UK GAAP is the greater emphasis placed under IFRS on classifying balances between current and non-current. As a result, balances such as receivables and inventories are frequently being presented as non-current − these would still be labelled as current under UK GAAP.
There are specific rules on the distinction between current and non-current assets. It includes assets being held as part of the business entity's operating cycle or those held for trading purposes in the short term and expected to be realised within 12 months of the balance sheet date.
As a result of this classification, companies may experience changes in key financial ratios, for example, liquidity and interest cover, which they are required to compute for purposes such as complying with bank covenants. Therefore, it has become very important for companies to ensure that all accounting balances are appropriately classified, particularly during economic changes such as the current credit crisis.
In light of the numerous external users of a company's financial statements, as briefly demonstrated above, it is increasingly important for companies to align presentation of their financial statements with the latest trends.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
