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General features of financial reporting (Materiality and aggregation (IAS…
General features of financial reporting
Fair presentation and compliance with IFRS Standards
IAS 1 states that financial statements should present the financial position, financial performance and cash flows of an entity fairly and accurately. This is presumed to be achieved by following relevant IFRS standards and ensuring tractions are fairly represented in accordance with the appropriate recognition criteria for assets, liabilities, income and expenses as set out in the IASB's Conceptual Framework
In the rare circumstances where compliance with IFRS Standards might result in users being misled by the financial statements, departure from IFRS Standards is permitted provide the nature, reasons and impact of the departure is disclosed
There must be good reasons for not following the prescribed rules and departure should only occur where non-departure would conflict with the objectives of the financial statements as set out in the Conceptual Framework. Even then, full disclosure must be given of the effect that would have been achieved by following accounting standards
Poor accounting (including selection of inappropriate accounting policies) cannot be rectified by disclosure of any kind of explanatory material
Going concern
Financial statements are prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading or has no realistic alternative but to do so
Where there are material uncertainties which cast significant doubt over the entity's ability to continue to operate in the foreseeable future, substantial disclosures are required so that users are given a clear picture of what future events might threaten the future of the company
Accruals basis of accounting
Financial statements are prepared on an accruals basis, except for cash flow information
Transactions are accounted for when income is earned or expenses are incurred, not when cash changes hand
The accruals concept is the basis for asset and liability recognition, allowing assets to be carried in the balance sheet until they have been consumed, scrapped or sold and liabilities to be shown as amounts owing until they have been settled
Materiality and aggregation
IAS 1 states that entities should present separately each material class of similar items
Items are dissimilar in terms of nature or function should be presented separately unless they are immaterial
The level of aggregation will depend on the extent to which the entity has similar material items to report
Materiality depends on the size and nature of the omission or misstatement, judged in the surrounding circumstances. The size or nature of the item or a combination of both could be the determining factors
The decision about whether an item is material or not requires the application of judgement, considered from the point of view of the reader of the accounts
Offsetting
An important principle is that items of revenue and expenses or assets and liabilities should not be offset against one another and shown on a net basis unless an accounting standard specifically permits it
This rule is important because the netting off of assets and liabilities can disguise transactions and therefore reduce the ability of stakeholders to get a true picture of the entity's assets and liabilities and assess its future cash flows
Comparative information
Accounting standards state that prior period comparative information should be provided in the financial statements for all amounts reported, both for amounts reported on the face of the financial statements and in the notes
At least one year of comparative information must be given for each statement and related note
If comparative figures are amended due to a change in accounting policy then this must also be disclosed