New Component Thru IAS 1 Revised

[mrafaykhan]

Dear Kamran Bhai,
I am getting some problem in understanding the new component of financial statement (mentioned in bold) included through Revised IAS 1.

1. a statement of financial position at the end of the period,
2. a statement of comprehensive income for the period,
3. a statement of changes in equity for the period
4. statement of cash flows for the period, and
5. notes, comprising a summary of accounting policies and other explanatory notes.
<b>6. When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements, it must also present a statement of financial position as at the beginning of the earliest comparative period.</b>

Kindly explain with the example.

Kind Regards,

Muhammad Rafay

[kamranACA]

Rafay,

I think if you study the "Introduction" paragraphs (regarding revision of IAS-1), the questions should get answered automatically.

However, I provide you some explanation. The revision of IAS-1 is a major step to achieve convergence with US reporting standards. This is part of a long process where standard setters were endeavoring to reach the closest conclusions across the globe on the matter of accounting principles i.e recognition, initial and subsequent measurements, derecognition, presentation and disclosures etc. We can understand that accounting on similar principles and conventions increases the level of understanding across the borders and would be helpful for cross border offerings.

Since IAS-1 is primarily regarding presentation, certain changes have been made to bring it closer to US requirements. Accordingly the names of financial statements components have been changed. Balance sheet is re-designated as Statement of Financial Position and Cash flow statement is renamed as statement of cash flows.

Besides this, it has stipulated that Statement of Changes in Equity should reflect only those changes in equity which arise from direct transaction with owners. The examples of such changes could be issuance of further share capital, redemption of share capital, net profit or loss available to owners and non-controlling shareholders (minority), and payment of dividends etc.

The non-owner changs in equity cannot be reflected in Statement of Changes in Equity. These will be taken to Statement of Comprehensive Income and {will be shown in statement of changes in equity as reconciliation for various components from the opening balance to the closing balance}. (don't give a stressful thought to the words in {} bracket. These are not that complex as they look).

The income statement (profit and loss account) was not previously supposed to include certain transactions which we were required to present in statement of changes in equity. Now such changes (non-owner changes in equity) will be routed through Comprehensive Statement of Income and the eventual net balance of profit or loss attributed to owners will be taken to statement of changes in equity.

The revised IAS-1 has further provided an option either to prepare only the Comprehensive Statement of Income and to include all incomes and expenses in it or to prepare "income statement" and Comprehensive Income Statement" seprately.

In a single-statement presentation, all items of income and expense are presented together.

In case these are prepared separately, the first statement (‘income statement’) will present income and expenses recognised in profit or loss and the second statement (‘statement of comprehensive income’) will begin with profit or loss and present, in addition, items of income and expense that IFRSs require or permit to be recognised outside profit or loss. Such items include, for example, translation differences related to foreign operations and gains or losses on available-for-sale financial assets. The revaluation of assets to the extent of loss previously charged in P/L account, and gains / losses on cash flow hedges are other examples. The incremental depreciation on revlaued asset previously taken to statement of changes in equity will also be taken to statement of comprehensive income.

There had been certain dissenting opinions from among the approving board on providing two statements option by revised IAS-1.

The statement of comprehensive income does not include transactions with owners in their capacity as owners. Such transactions are presented in the statement of changes in equity.

As regards to your query at point 6; IAS 1 now requires an entity to present a statement of financial position as at the beginning of the earliest comparative period in a complete set of financial statements when the entity applies an accounting policy retrospectively or makes a retrospective restatement, as defined in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, or when the entity reclassifies items in the financial statements.

Previously, a disclosure was required along with revision of comparative information starting from the earliest period presented i.e. the opening balance of retained earnings in statement of changes in equity, the comparitive results in P/L account (and statement of changes in equity) and current results. Disclousre was to be made about financial impact on profit, equity and EPS etc.

All these requirements are included in revised IAS-1. However, there has been added a new requirement to show the revised balance sheet (statement of financial position) of earliest period assuming to have such adjustments been made in that relevant period.

I am not clear about whether such additional balance sheet would be shown in notes to the accounts or as a separate component of financial statements. The paragraph 10 of revised IAS-1 however suggests that it would be a separate component.

Please also note that the names of components of financial statements suggested by IAS-1 are not mandatorily to be used. It's paragraph 10 allows to use titles other than what has been used in IAS-1.

I am short of time, so this post has been written partially at various timings and may lack some conceptual continuety. However, I guess this will help you. Further, now IAS-1 is among the most important standards, so I must advise you study it in depth. I mean from A to Z.


Regards,


KAMRAN.

[mrafaykhan]

Thanks Kamran bhai for your prompt reply, but I am still confused as my query was pertain to component number 6 only, which is

<b>6. When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements, it must also present a statement of financial position as at the beginning of the earliest comparative period.</b>


I want to understand it by any illustrative example like if a company revise its 2 policies A and B in year 2008 and the retrospective effect of two policies change financials, Policy A had been applying since June 2006 and policy B since August 2005.
Now in the light of above component 6, what will be the date for which the comparative Statement of Financial Position will be made.

Kind Regards,

Muhammad Rafay

[mrafaykhan]

For my above query for further clarification I mentioned that the year end will be December 31st 2008, so

Statement of Financial Position
As at December 31st, 2008

December ????
2008 ??

Regards,

Muhammad Rafay

[kamranACA]

Dear Rafay,

I would like to draw your attention to particular words "it must also present a statement of financial position as at the beginning of the earliest comparative period".

The more emphasis should be on "as at the beginning of the earliest comparative period". Of course we cannot go beyond the earliest comparative period presented.

Now, you can understand that while drafting financials as at 31 December 2008 what could be the earliest comparative period. In balance sheet, P/L and Cashflow the earliest comparative is always the last year. However statement of changes in equity is the component where earliest comparative period is not merely the last year. Rather, it starts from the beginning of the last year (or you can say end of the year prior to the last year).

In your example the balance sheet, P/L and cashflow of 31 December 2008 the comparative earliest period would be the year ending on 31 December 2007. However, the statement of changes in equity is not supposed to start from 31 December 2007. Rather, it starts from 01 January 2007 (or you can say 31 December 2006).

As far as changes in policies are concerned, their effect has to be given to the figures of the earliest presented comparative period. We cannot go beyond this period. As at 31 December 2008 if two policies are changed, we cannot make a choice to give the effect of one change from a particular year i.e. 2006,and the effect of other change from another year i.e. 2005.

All such policies changes have to be considered retrospectively as these were in vogue since all the times and accordingly there would be no choice except to take their effect from the earliest comparative period presented i.e.

• the effect of such change to the results and balances until 31 December 2006, will be taken in statement of changes in equity affecting the opening balances retained earnings or other equity components of 01 January 2007,

• the effect on the comparative P/L and Cash flow will be taken in the results for the year ended 31 December 2007 and

• the effect on current year's P/L and cash flow will be taken in current year's financials. Balance sheet of each date would automatically be revised.

Upto this point there is no conceptual change from the previous version of IAS-1.

Now, the additional disclosure requirement is to draft a balance sheet of the earliest comparative period (i.e. as at 31 December 2006 or 01 January 2007) to show the impact of such changes on the earliest period presented.

Yet, there is no conceptual change except for this additional disclosure requirement which in my view has been necessitated for the reason that as per previous version of IAS-1 we used to change the figures of retained earnings of 01 January 2007 (31 December 2006) and take the corresponding affect to other accounts that may be of assets or liabilities. Although the corresponding accounts were revised but the balances of those other accounts could not shown as at 01 Janaury 2007 (31 December 2006). This was because the balance sheet was to be drafted as at 31 December 2008 with comparative of 31 December 2007. Now after this change, when we will show the impact on retained earnings/ equity, we will also be showing its impact on corresponding accounts as of the same date, by preparaing an additional balance sheet. This will come up with more clarity as to how those changes affected all the concerning balances on that particular date.

I hope this will be helpful.

Regards,


KAMRAN.