The objective of financial statements is to provide information for economic decisions. A complete set of financial statements comprises a balance sheet, income statement, statement of changes in equity, cash flow statement and explanatory notes (including accounting policies). There is no prescribed format for the financial statements. However, the Implementation Guidance for the IFRS for SMEs includes a full illustrative set of financial statements and a disclosure checklist. There are minimum disclosures to be made on the face of the financial statements as well as in the notes.
This post provides minimum financial statements disclosures checklist for Small Medium-sized Entities [SMEs] who implement IFRS for SMEs. Follow on…
The balance sheet presents an entity’s financial position at a specific time. Items presented on the face of the balance sheet The following items, as a minimum, are presented on the face of the balance sheet.
- Assets – Property, plant and equipment (PPE); intangible assets; financial assets; investments accounted for using the equity method; biological assets; deferred tax assets; current tax assets; inventories; trade and other receivables; and cash and cash equivalents.
- Equity – Equity attributably to shareholders of the parent; and minority interest presented separately from parent shareholder equity interests.
- Liabilities – Deferred tax liabilities; current tax liabilities; financial liabilities; provisions; and trade and other payables.
- Assets and liabilities held for sale – The total of assets classified as held for sale and assets included in disposal groups classified as held for sale; and liabilities included in disposal groups classified as held for sale
Current and non-current assets and current and non-current liabilities are presented as separate classifications on the face of the balance sheet, unless presentation based on liquidity provides reliable and more relevant information.
- An asset is classified as current if it is expected to be realized, sold or consumed in the entity’s normal operating cycle (irrespective of length); primarily held for the purpose of being traded; expected to be realized within 12 months after the balance sheet date; or cash and cash equivalent (without restrictions beyond 12 months after the balance sheet date).
- A liability is classified as current if it is expected to be settled in the entity’s normal operating cycle; primarily held for the purpose of being traded; due to be settled within 12 months after the balance sheet date; or the entity does not have an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.
The income statement presents an entity’s income and expenses over a specific period of time.
Items To Be Presented On The Face Of The Income Statement – The following items, as a minimum, are presented on the face of the income statement: revenue; finance costs; share of the profit or loss of associates and joint ventures accounted for using the equity method; tax expense; a single item comprising the total of (1) the post-tax profit or loss of discontinued operations, and (2) the post-tax gain or loss recognized on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation; and profit or loss for the period.
Profit or loss for the period is allocated on the face of the income statement to the amount attributable to minority interest and to the parent’s equity holders.
Additional line items or subheadings are presented on the face of the income statement when such presentation is relevant to an understanding of the entity’s financial performance.
An analysis of total expenses is presented either on the face of the income statement or in the notes, using a classification based on either the nature or function of expenses.
Exceptional And Extraordinary Items – The IFRS for SMEs does not use the term ‘exceptional items’. However, it requires the separate disclosure of items of income and expenses that are material. Disclosure may be on the face of the income statement or in the notes. Such income and expenses may include restructuring costs; write-downs of inventories or PPE; discontinued operations; litigation settlements; reversals of provisions; and gains or losses on disposals of PPE and investments.
Extraordinary items are not permitted.
Statement Of Changes In Equity
The statement of changes in equity presents a reconciliation of equity items between the beginning and end of the period. The following items are presented on the face of the statement of changes in equity:
- profit or loss for the period;
- each item of income or expense recognized directly in equity (for example, revaluation gains on PPE, currency translation differences arising on the translation of the financial statements from the functional to the presentation currency) and their total;
- total income and expense for the period (the sum of (a) and (b)), showing separately the total amounts attributable to equity holders of the parent and to minority interest; and
- for each component of equity, the effects of changes in accounting policies and corrections of material prior-period errors.
Details of distributions, the balance of retained earnings and a reconciliation of the carrying amount of each class of equity and each item recognized directly in equity are presented either on the face of the statement of changes in equity or in the notes to the financial statements.
Statement of Income and Retained Earnings
If the only changes to the equity of an entity during the period are a result of profit or loss, payment of dividends, correction of prior-period errors or changes in accounting policy, the entity is permitted to present a statement of income and retained earnings in place of both an income statement and a statement of changes in equity.
The following items must be presented on the face of the statement of income and retained earnings:
- retained earnings at the start of the period;
- dividends declared and paid or payable during the period;
- restatement of retained earnings for correction of prior-period errors;
- restatement of retained earnings for changes in accounting policy; and
- retained earnings at the end of the period.
Cash Flow Statement
The cash flow statement presents the generation and use of cash by category (operating, investing and finance) over a specific period of time.
- Operating activities are the entity’s revenue-producing activities.
- Investing activities are the acquisition and disposal of non-current assets (including business combinations) and investments.
- Financing activities are changes in the equity and borrowings.
Entities may present their operating cash flows by using either the direct method (gross cash receipts and payments) or the indirect method (adjusting net profit or loss for non-operating and non-cash transactions, and for changes in working capital).
Non-cash transactions include impairment losses or reversals, depreciation, amortization, unrealised fair value gains and losses, and income statement charges for provisions.
Cash flows from investing and financing activities are reported separately gross (i.e., gross cash receipts and gross cash payments).
Accounting Policies, Estimates And Errors
Where the IFRS for SMEs does not address a transaction, other event or condition, management should use its judgment in developing and applying an accounting policy that results in information that meets the qualitative characteristics.
If there is no relevant guidance, management should consider the applicability of the following sources, in descending order: the requirements and guidance in the IFRS for SMEs on similar and related issues; and the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses.
Management may also consider full IFRS, the most recent pronouncements of other standard-setting bodies, other accounting literature and accepted industry practices to the extent that these do not conflict with the concepts in the IFRS for SMEs and its Framework.
Management should choose and apply consistently one of the available accounting policies. Accounting policies are applied consistently to similar transactions and events.
Changes In Accounting Policies
Changes in accounting policies as a result of an amendment to the IFRS for SMEs standard are accounted for in accordance with the transition provisions of that amendment.
- If specific transition provisions do not exist, management follows the same procedures as for correction of prior-period errors explained below.
- If the IFRS for SMEs provides a choice of accounting policy for a specific transaction, and an entity changes its choice, this is a change of accounting policy.
Critical Accounting Estimates And Judgments
An entity discloses the nature and carrying amount of those assets and liabilities in which judgments, estimates and assumptions have a significant risk of causing a material adjustment to the carrying amounts within the next financial period.
Changes In Accounting Estimates
Changes in accounting estimates are recognized prospectively by including the effects in profit or loss in the period that is affected (i.e., the period of the change and future periods) except if the change in estimate gives rise to changes in assets, liabilities or equity. In this case, it is recognized by adjusting the carrying amount of the related asset, liability or equity in the period of the change.
Corrections Of Prior-Period Errors
Errors may arise from mistakes and oversights or misinterpretation of available information.
Material prior-period errors are adjusted retrospectively (ie, by adjusting opening retained earnings and the related comparatives). There is an exception when it is impracticable to determine either the period-specific effects or the cumulative effect of the error. In the latter case, management corrects such errors prospectively from the earliest date practicable.
The error and effect of its correction on the financial statements are disclosed.
Notes To The Financial Statements
The notes are an integral part of the financial statements. Information presented in an entity’s balance sheet, income statements, statement of changes in equity (or statement of income and retained earnings) and cash flow statement are cross-referenced to the relevant notes where possible.
Notes provide additional information to the amounts disclosed on the face of the primary statements. The following disclosures are included, as a minimum, within the notes to the financial statements:
- a statement of compliance with the IFRS for SMEs;
- accounting policies;
- critical accounting estimates and judgments;
- and information not presented in the primary statements but required by the IFRS for SMEs.
Entities also disclose, where applicable, changes in accounting policies, changes in accounting estimates and information about externally imposed capital requirements.
An entity is permitted to provide additional information that is not explicitly required by the IFRS for SMEs in the notes provided it is relevant to an understanding of the financial statements.
Related parties include:
- fellow subsidiaries;
- joint ventures, key personnel of the entity and its parent (which include close members of their families);
- parties with control or joint control or significant influence over the entity (which include close members of their families, where applicable); and
- post-employment benefit plans.
Related parties exclude, for example: finance providers and governments in the course of their normal dealings with the entity.
The names of the immediate parent and the ultimate controlling parties (which could be an individual or a group of individuals) are disclosed irrespective of whether there have been transactions with those related parties.
Where there have been related-party transactions, disclosure is made of the nature of the relationship, the amount of transactions, and outstanding balances and other elements necessary for a clear understanding of the financial statements (for example, volume and amounts of transactions, amounts outstanding and pricing policies). The disclosure is made by certain categories of related party and by major types of transaction. Items of a similar nature may be disclosed in aggregate (for example, short-term employee benefits) except when separate disclosure is necessary for an understanding of the effects of related-party transactions on the reporting entity’s financial statements.
Disclosures that related party transactions were made on terms equivalent to those that prevail in arm’s length transactions are made only if such terms can be substantiated.
Events After The End Of The Reporting Period
Events after the end of the reporting period may qualify as adjusting events or non-adjusting events. Adjusting events provide further evidence of conditions that existed at the end of the reporting period. Non-adjusting events relate to conditions that arose after the end of the reporting period.
Dividends proposed or declared after the end of the reporting period are not recognized as a liability at the balance sheet date.
Management discloses the date on which the financial statements were authorized for issue and who gave that authorization. If the owners or other persons have the power to amend the financial statements after issue, this fact is also disclosed.
An entity’s first financial statements that conform to the IFRS for SMEs are the first annual financial statements in which the entity makes an explicit and unreserved statement of compliance with the IFRS for SMEs.