Understanding IND AS 1: Presentation of Financial Statements

Introduction

The Indian Accounting Standards (IND AS) were introduced in India in 2015, to bring greater transparency and consistency to financial reporting. One of the key standards is IND AS 1 - Presentation of Financial Statements. This standard sets out the principles and requirements for the presentation of financial statements, which are the primary means of communicating financial information to users.

Overview of IND AS 1

Scope of IND AS 1

IND AS 1 applies to all entities that prepare financial statements in accordance with IND AS. The standard sets out the requirements for the presentation of financial statements, including the balance sheet, income statement, statement of changes in equity, and statement of cash flows. It also specifies the minimum requirements for disclosures in the notes to the financial statements.

Purpose of IND AS 1

• The purpose of IND AS 1 - Presentation of Financial Statements is to ensure that financial statements provide information that is relevant, reliable, comparable, and understandable to users. This standard sets out the principles and requirements for the presentation of financial statements, which are the primary means of communicating financial information to users.
• IND AS 1 establishes the minimum requirements for the presentation of financial statements, including the balance sheet, income statement, statement of changes in equity, and statement of cash flows. It also specifies the minimum requirements for disclosures in the notes to the financial statements.
• By setting out the principles and requirements for the presentation of financial statements, IND AS 1 ensures that financial statements provide a fair and accurate representation of an entity's financial position, performance, and cash flows. This helps users to make informed decisions about the entity's financial health and prospects, and promotes transparency and accountability in financial reporting.

Key principles of IND AS 1

• Accrual Accounting: IND AS 1 requires entities to use the accrual basis of accounting to recognize revenue and expenses in the financial statements. Accrual accounting recognizes revenues and expenses when they are earned or incurred, regardless of when cash is received or paid. This provides a more accurate picture of an entity's financial performance and position.
• Going Concern Assumption: IND AS 1 assumes that an entity will continue to operate for the foreseeable future, unless there is evidence to the contrary. This allows financial statements to be prepared on a basis that assumes the entity will continue to operate, which is important for making meaningful financial projections and evaluating an entity's long-term viability.
• Consistency of Presentation: IND AS 1 requires entities to present financial statements in a consistent manner from one period to the next. This includes using consistent accounting policies, formats, and classifications. This principle ensures that users can compare an entity's financial performance and position over time and make informed decisions based on this information.
• Materiality: IND AS 1 requires entities to consider the materiality of information when presenting financial statements. Materiality refers to the significance of information in the context of the financial statements as a whole. This principle ensures that financial statements focus on information that is relevant and useful to users.
• Fair Presentation: IND AS 1 requires entities to present financial statements fairly, which means that the financial statements must be free from material misstatements and errors. Fair presentation also requires entities to provide adequate disclosures in the notes to the financial statements, which helps to ensure that users have a complete understanding of the financial statements.

Requirements of IND AS 1

Balance sheet

When preparing a balance sheet in accordance with IND AS, there are certain key requirements that must be met. Here is a guide to drafting a balance sheet in compliance with IND AS:

• Asset Classification: Assets should be classified as current or non-current. Current assets are those that are expected to be realized or consumed within 12 months, while non-current assets are those that are expected to be held for more than 12 months.
• Liability Classification: Liabilities should be classified as current or non-current. Current liabilities are those that are expected to be settled within 12 months, while non-current liabilities are those that are expected to be settled after more than 12 months.
• Equity: Equity should be presented separately on the balance sheet, and should include any reserves or accumulated profits. The components of equity should be clearly disclosed, including any changes in equity during the reporting period.
• Valuation: Assets and liabilities should be valued at fair value, unless the standard specifically requires a different valuation basis. Fair value is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
• Off-Balance Sheet Items: Off-balance sheet items should be disclosed in the notes to the financial statements. This includes any contingent liabilities or assets that may have an impact on the financial position of the entity.
• Comparative Figures: The balance sheet should include comparative figures for the previous reporting period, unless this is not practicable.
• Disclosure: The balance sheet should include adequate disclosures to enable users to understand the financial position of the entity. This includes details of significant accounting policies, estimates and judgments, and any material events or transactions that have occurred during the reporting period.

Income statement

When preparing an income statement in accordance with IND AS, there are certain key requirements that must be met. Here is a guide to drafting an income statement in compliance with IND AS:

• Revenue Recognition: Revenue should be recognized when it is earned, and it should be measured at the fair value of the consideration received or receivable.
• Cost of Sales: The cost of sales should be recognized as an expense in the same period as the related revenue is recognized.
• Operating Expenses: Operating expenses should be recognized in the period in which they are incurred, and should be classified by nature (e.g. selling and distribution expenses, administrative expenses, etc.).
• Finance Costs: Finance costs should be recognized in the period in which they are incurred, and should include interest expense on borrowings and other financing costs.
• Income Taxes: Income tax expense should be recognized in the period in which the related income is recognized, using the applicable tax rate.
• Earnings per Share: Earnings per share should be disclosed on the income statement, calculated using the weighted average number of shares outstanding during the reporting period.
• Comparative Figures: The income statement should include comparative figures for the previous reporting period, unless this is not practicable.
• Disclosure: The income statement should include adequate disclosures to enable users to understand the entity's financial performance. This includes details of significant accounting policies, estimates and judgments, and any material events or transactions that have occurred during the reporting period.

Statement of changes in equity

When preparing a statement of changes in equity in accordance with IND AS, there are certain key requirements that must be met. Here is a guide to drafting a statement of changes in equity in compliance with IND AS:

• Opening Balance: The statement should begin with the opening balance of equity at the beginning of the reporting period.
• Changes in Equity: The statement should include all changes in equity during the reporting period, including the effects of any adjustments or corrections made during the period.
• Comprehensive Income: The statement should disclose the components of comprehensive income for the reporting period, including any items of income or expense that are recognized directly in equity.
• Dividends: The statement should disclose any dividends or other distributions made during the reporting period.
• Share-Based Payments: The statement should disclose the effects of any share-based payment transactions during the reporting period.
• Reconciliation: The statement should include a reconciliation between the opening and closing balances of each component of equity, including share capital, share premium, retained earnings, and any other reserves.
• Comparative Figures: The statement should include comparative figures for the previous reporting period, unless this is not practicable.
• Disclosure: The statement should include adequate disclosures to enable users to understand the changes in equity during the reporting period. This includes details of significant accounting policies, estimates and judgments, and any material events or transactions that have occurred during the reporting period.

Statement of cash flows

When preparing a statement of cash flows in accordance with IND AS, there are certain key requirements that must be met. Here is a guide to drafting a statement of cash flows in compliance with IND AS:

• Operating Activities: The statement should begin with the net cash inflow or outflow from operating activities, which should be prepared using the indirect method.
• Investing Activities: The statement should disclose the net cash inflow or outflow from investing activities, which includes cash flows related to the acquisition and disposal of long-term assets, investments, and other financial instruments.
• Financing Activities: The statement should disclose the net cash inflow or outflow from financing activities, which includes cash flows related to the issuance and repayment of debt, equity instruments, and other financing activities.
• Reconciliation: The statement should include a reconciliation between the opening and closing balances of cash and cash equivalents, which should include the effects of exchange rate changes.
• Non-Cash Transactions: The statement should disclose any significant non-cash transactions that have affected the entity's financial position during the reporting period, such as the issuance of shares in exchange for assets or the conversion of debt into equity.
• Comparative Figures: The statement should include comparative figures for the previous reporting period, unless this is not practicable.
• Disclosure: The statement should include adequate disclosures to enable users to understand the entity's cash flows during the reporting period. This includes details of significant accounting policies, estimates and judgments, and any material events or transactions that have occurred during the reporting period.

Other Comprehensive Income

Other Comprehensive Income (OCI) is a reporting category in financial statements that reflects gains and losses that are not recognized in the income statement. OCI includes items that affect the financial position of a company but are not part of its normal operations. These gains and losses are usually recognized directly in equity, bypassing the income statement.

The concept of OCI is important because it allows for a more comprehensive view of a company's financial performance and position. Here are some of the items that are commonly included in OCI:

• Unrealized Gains or Losses on Available-for-Sale Securities: Companies must record any changes in the fair value of securities they hold as available for sale. These changes are recorded directly in OCI, rather than in the income statement.
• Foreign Currency Translation Adjustments: Companies that operate internationally must account for exchange rate fluctuations. OCI is used to record gains and losses that arise from these fluctuations.
• Changes in the Fair Value of Derivatives: Companies that use derivatives such as futures, options, or swaps to hedge their exposure to market risks must record any changes in the fair value of these derivatives in OCI.
• Pension Plan Gains and Losses: Companies that offer defined benefit pension plans must record any gains or losses that arise from changes in the value of plan assets or from changes in actuarial assumptions in OCI.
• Revaluation Surplus: Companies that revalue their fixed assets to reflect changes in their market value must record any resulting gains or losses in OCI.

While these items do not impact the company's bottom line, they can have a significant impact on its financial position. By recording these items in OCI, investors and analysts can get a more complete picture of the company's financial performance and position. Companies are required to disclose the items included in OCI in the notes to their financial statements, along with any tax implications of these items.

Disclosures required by IND AS

IND AS 1 requires companies to provide certain disclosures in their financial statements to ensure that users of the financial statements have a clear understanding of the company's financial position, performance, and cash flows. Here are some of the key disclosures required under IND AS 1:

• Statement of compliance: The financial statements should include a statement that they have been prepared in accordance with the requirements of IND AS.
• Significant accounting policies: The financial statements should disclose the significant accounting policies that have been used in preparing the financial statements, including any changes in those policies.
• Judgments and estimates: The financial statements should disclose any significant judgments and estimates made in the preparation of the financial statements, including the methods used to determine these estimates.
• Materiality: The financial statements should disclose any items that are considered to be material to the financial statements, either individually or in aggregate.
• Going concern: If the company's ability to continue as a going concern is in doubt, the financial statements should disclose this fact and provide any related information.
• Events after the reporting period: The financial statements should disclose any events that have occurred after the reporting period but before the financial statements are authorized for issue.
• Related party transactions: The financial statements should disclose any related party transactions that have occurred during the reporting period, including the nature of the relationship and the amounts involved.
• Segment reporting: If the company operates in multiple segments, the financial statements should disclose information about those segments, including revenue, profit or loss, assets, and liabilities.
• Earnings per share: If the company has issued equity instruments, the financial statements should disclose the earnings per share for the reporting period.
• Share capital: The financial statements should disclose information about the company's share capital, including the number of shares issued, their par value, and any changes in share capital during the reporting period.
• Cash flows: The financial statements should disclose information about the company's cash flows, including the net cash flow from operating, investing, and financing activities.
• Contingent liabilities: The financial statements should disclose any contingent liabilities, including the nature of the contingency, the likelihood of it being resolved, and the potential financial impact on the company.

These are some of the key disclosures required under IND AS 1. Companies must also provide any additional disclosures that are necessary to ensure that the financial statements provide a true and fair view of the company's financial position, performance, and cash flows.

Guidance notes on IND AS-1

The Institute of Chartered Accountants of India (ICAI) has issued a guidance note on IND AS 1, which provides additional guidance to companies in complying with the standard. The guidance note aims to provide clarity on certain aspects of IND AS 1 and help companies in preparing their financial statements.

The guidance note covers several areas such as the presentation of financial statements, the use of estimates, and the preparation of interim financial statements. It also provides examples and illustrations to help companies better understand the requirements of the standard.

One of the key aspects covered in the guidance note is the presentation of financial statements. The note provides guidance on the presentation of assets, liabilities, equity, revenue, expenses, and cash flows. It also provides guidance on the classification of items as current or non-current, the presentation of related party disclosures, and the use of fair value measurements.

Another area covered in the guidance note is the use of estimates. The note provides guidance on the use of estimates in the preparation of financial statements, including the estimation of useful lives of assets, the assessment of impairment, and the calculation of provisions.

The guidance note also provides guidance on the preparation of interim financial statements, which are financial statements prepared for a period shorter than a full financial year. The note covers the presentation of interim financial statements, the disclosure requirements for interim financial statements, and the use of estimates in the preparation of interim financial statements.

In conclusion, the guidance note on IND AS 1 provides additional guidance and clarification to companies in complying with the standard. The note covers several areas, including the presentation of financial statements, the use of estimates, and the preparation of interim financial statements. Companies can use this guidance to ensure that their financial statements comply with the requirements of IND AS 1.

Conclusion

 IND AS 1 sets out the overall framework for financial reporting under Indian Accounting Standards (IND AS) and establishes guidelines for the preparation and presentation of financial statements. The standard provides guidance on the selection of accounting policies, the treatment of changes in accounting policies, and the presentation of comparative information in financial statements.

IND AS 1 also sets out the requirements for the presentation of financial statements, including the minimum components that must be included in the statement of financial position, the statement of profit and loss, and the statement of changes in equity. The standard also requires the disclosure of additional information in the notes to the financial statements to provide a complete understanding of the financial position and performance of the entity.

Overall, IND AS 1 plays a crucial role in enhancing transparency and consistency in financial reporting, which ultimately leads to more informed decision-making by users of financial statements. It is important for companies to comply with IND AS 1 and ensure that their financial statements are presented fairly and accurately in accordance with the standard.